It’s hard to believe it has been a quarter century since exchange-traded funds first hit the scene in the U.S. You likely haven’t been using them for that long, because in the early days these funds were essentially the province of institutional investors who wanted to build and own various baskets of blue-chip stocks.
Of course, these days the domestic ETF industry has mushroomed into a $3.56 trillion juggernaut with 2,216 products (both ETFs and exchange-traded notes) on the market, according to XTF Research.
At an event this week in New York City sponsored by State Street Global Advisors, a panel of industry insiders gathered to look ahead to see what the next 25 years in this industry might bring. And they took note of an industry that already has a great deal of momentum.
“Inflows of roughly $460 billion for ETFs in 2017 were greater than any single year that mutual funds have ever seen,” noted Jim Ross, chairman of SSGA’s global SPDR business.
And ETF transactions are starting to have a significant impact on trading floors. Doug Yones, head of exchange-traded products at the New York Stock Exchange, noted that ETFs comprise 30 percent of all current trading volume at the NYSE.
Even as the industry continues attracting more assets, fund sponsors are starting to change their approach to new fund launches. “You used to be able to take a flyer and see what works,” Ross said. “Now the standards for a new fund launch are much higher.” He said SSGA must have significant conviction that a new fund will attract a large asset base.
“If you don’t have a plan to get your first $50 or $75 million in the door, you really need to question whether it makes sense,” he noted.
It helps to line up demand for an ETF before it launches. Deutsche Bank, for example, launched a pair of bond funds on January 11 with a set of investors already in in place, and those funds now have more than $100 million in assets under management.
The event’s panelists also took note of the “me too” syndrome that besets many new funds, which often hold similar portfolios to funds that already exist. “You have more than 2,000 funds choosing from the same 3,800 stocks,” said Josh Brown, CEO of Ritholtz Asset Management. (That comment appears to exclude any foreign stocks that are in domestic funds.)
“How many ways can you slice and dice the markets?” he asked.