January 22, 2018, marks the 25th anniversary of the listing of the SPDR S&P 500 ETF (SPY), the first U.S.-listed exchange-traded fund. During the past 10 years, the ETF industry in the U.S. has seen significant growth, including another record year of inflows in 2017. I believe the robust growth rate will continue in 2018 and that assets will hit the $5 trillion mark in 2020.
A number of tailwinds will likely fuel the growth in users, uses, assets, products and providers of ETFs and other exchange-traded products—both in the U.S. and globally.
Some of the tailwinds propelling the ETF industry include:
• The increasing difficulty investors have in finding mutual funds or even hedge funds that consistently deliver alpha (at the same time they have learned that costs matter a lot in long-term performance).
• The growing number of institutional investors, financial advisors and retail investors who view ETFs as an investment solution across all asset classes.
• The burgeoning roster of new issuers and new types of ETFs and ETPs.
Other catalysts for the ETF industry include regulatory changes, the relative performance and cost of alternative products, and the growth of the robo-advice industry and ETF strategists who use ETFs as fundamental building blocks of investor portfolios.
In a broad sense, the steady swelling of ETF assets embodies the trend toward index-based products that has come at the expense of actively managed mutual funds and even hedge funds. And it certainly helps that ETFs are easy to use and understand, and that they are cost-efficient, transparent, liquid and tax-efficient investment vehicles.
And increasingly, fee-conscious investors have noticed that ETF costs on average have decreased at a time when the cost of futures, swaps and other investment products are going up. That has helped fuel the growing acceptance of ETFs and ETPs among institutional investors, who can now replicate some of their strategies more cost-effectively with ever-sophisticated ETP products.
During the past quarter century, ETFs have expanded beyond broad-based U.S. equity indexes to tap into the investment universe across global equities, fixed income, commodities, currencies and various alternative asset classes. And benchmarks are evolving to incorporate different strategies such as smart beta, thematic, impact investing and ESG (environmental, social and governance) investing.