Global assets invested in exchange-traded funds and exchange-traded products reached a record $1.76 trillion through the end of August 2012, notching a 15.5% growth through the first eight months of this year, up from $1.53 trillion at the end of 2011, according to data from ETFGI LLP, a London-based independent research and consulting firm.
The record level should come as little surprise to many investors and financial advisors who have watched the upstart ETF and ETP industry’s dramatic asset growth over the past several years—growth that has often come at the expense of traditional investments like mutual funds. Over the past 10 years, the compounded annual growth rate of ETFs and ETPs globally has been 26.5%. And now there are currently 4,713 ETFs and ETPs, with 9,620 listings, offered from 204 providers on 56 global exchanges, according to ETFGI.
But the challenging market conditions of the past few years, and the struggle for alpha that many actively managed investments have had, have greatly boosted the popularity of ETFs and ETPs. Proponents of the products say that ETFs also provide greater transparency in relation to costs, portfolio holdings, price, liquidity, product structure, risk and return compared to many other investment products and mutual funds.
An initial favorite with retail investors, now ETFs are becoming more widely used by institutional investors and financial advisors for a variety of reasons, including:
• to equitize cash;
• to gain diversified exposure to a market;
• as a long-term, core or secondary investment;
• to make strategic adjustments to portfolios;
• as building blocks to create new portfolios;
• as a market hedge; and
• as an alternative to futures and other derivative products.
“ETFs have proved that they are here to stay and might be considered one of the most innovative financial products in the last two decades,” said Deborah Fuhr, Managing Partner at ETFGI, in a statement. “They are one of the few products that are offered on the same terms to both retail and institutional investors.”
Indeed, market observers have watched with interest at how capital flows within differing classes of ETFs and ETPs this year have given a window into changing investor sentiment among the asset classes. Through the end of August, ETFs and ETPs saw net inflows of $143 billion—roughly $23 billion, or 17%, above the level of net new assets that ETFs and ETPs saw at this time last year, according to ETFGI. The lions’ share of the new inflows have gone to equity ETFs and ETPs, which gathered $76 billion; followed by fixed income ETFs and ETPs with $47 billion; and commodity ETFs and ETPs with $10.5 billion.
Equity focused ETFs and ETPs surpassed last year’s new inflows, gathering $7 billion more through August than at this time last year, according to ETFGI. ETFs and ETPs focused in U.S./North American equities gathered $39 billion through August; followed by emerging market equity with $22 billion; and Asia Pacific equity with $7 billion.
Fixed income ETFs and ETPs also seem to be gaining in popularity, notching $1 billion more in new assets than at this time last year. In the fixed income arena, the most popular sectors are corporate bond products, with $18.5 billion in net inflows so far this year; followed by high yield products with $11 billion; and broad/aggregate bond exposures with $4.9 billion.
One lagging sector is ETFs and ETPs that focus on commodities, which saw flows at a slightly lower level through the end of August than at this time last year. ETFs and ETPs that focus on precious metals had by far the largest net inflows with $9.5 billion; followed by broad commodities with $1.3 billion; and energy with $901 million. Agriculture-based ETFs and ETPs actually saw net outflows of $1.2 billion through the end of August, according to ETFGI.