“It will be paramount that every existing asset manager have a viable ETF strategy moving forward,” said Nate Geraci, president of the ETF Store, an advisory firm. “The asset managers just now joining the ETF party are late, but they can still get in the door. The longer this goes on, the more difficult it is.”
Dimensional is one of numerous Wall Street holdouts including Wells Fargo and T. Rowe Price to finally embrace ETFs after a rule change in 2019 made launches easier and paved the way for structures that hide strategies. That trend has continued in 2021—famed tech investor Ryan Jacob’s firm Jacob Asset Management became the latest to join the fray on Wednesday.
There may be a natural limit to the flood of cash from mutual funds. The entire U.S. retirement system is built around them, meaning for many portfolios it would be impossible to shift.
At the same time, mutual funds are also sitting on net inflows this year. Equity products have bled $206 billion, but those focused on fixed income—where active money management remains dominant—have added $302 billion, helping create a net $89 billion gain overall. The industry’s exact assets depend on how you define the market, but it still controls in the region of $20 trillion.
Meanwhile, ETFs may yet face constraints. A trio of money managers—BlackRock, Vanguard and State Street Corp.—account for roughly 80% of the market, and thanks to the boom, they now control vast chunks of Corporate America.
This “Big Three” collectively own about 22% of the typical S&P 500 company, according to Bloomberg data, up from 13.5% in 2008. That’s drawing the attention of regulators and raising concerns about what such dominance means for everything from corporate governance to how markets function.
Bigger, more established ETFs tend to attract the lion’s share of flows, so it’s a problem that’s only growing as cash pours in. Equity ETFs have already shattered their annual flow record, luring $372 billion compared with the best-ever $333 billion in 2017.
It’s a feat made possible by the historic stock rally: America’s benchmark gauge, the S&P 500, has repeatedly set all-time highs this year.
“The stock market has been on an incredible journey over the past year,” said Fiona Cincotta, senior financial markets analyst at City Index. “That sense of wanting to get involved and that fear of missing out is a big driver for getting money invested in the market.”
Another big draw has been the star asset manager Cathie Wood. The eight ETFs at her firm, Ark Investment Management, have pulled in $15.3 billion this year amid a frenzy for thematic investments built around trends like robotics or electric vehicles.
Performance helped, too: Wood’s funds were among the best in the U.S. last year. Alongside her success in luring cash, it’s made her the poster child for active management in ETFs.
The number of active fund launches is accelerating dramatically, and with 142 debuts versus 65 for passive products this will be the first year they outnumber their index-linked rivals. Flows help explain the rush: at around 4% of the U.S. market, active ETFs are claiming about 10% of incoming cash.
There are no guarantees the annual ETF flow record will be broken, of course. The second-half of 2021 could sour, and all that new cash could run for the exits. But history suggests it’s unlikely.
ETFs have collectively lost money only two months in the past three years. Even then, outflows are often relatively mild. As the world economy ground to a halt because of the pandemic in March last year and global stock markets crumpled, $357 billion was pulled from U.S. mutual funds. For ETFs, it was more like $17 billion.
“ETFs are an easy button of sorts that you can hit to get exposure to any number of different segments of the market, which draws from a much broader investor base than mutual funds ever had,” said Morningstar’s Johnson.
This article was provided by Bloomberg News.