By any measure, 2017 was a breakout year for exchange traded funds (ETFs). Globally, an unprecedented $630 billion flowed into ETFs, some three-quarters of which came from the U.S. As a result, close to $5 trillion is currently hard at work for ETF investors, helping them participate in the markets conveniently, precisely and generally at low costs.
When you consider that these record flows followed on the heels of a string of record flows—a “mere” $285 billion in 2016—then it’s clear that something meaningful is afoot.
Worldly, wealthy and wise
I’m often asked what’s behind the surging interest in ETFs, and by implication whether it can last. In fact, it can and I believe it will, thanks to three major forces at work:
1. The most consequential is who is stepping hardest on the gas—namely retail, or “wealth,” investors. In the U.S, we estimate that individuals and financial advisors accounted for roughly two-thirds of new cash into ETFs in 2017 (source: BlackRock). One in three American investors now owns an ETF, according to BlackRock’s recently released ETF Pulse survey. What’s more, 88% of them plan to invest more in the coming year.A powerful catalyst here is the industry’s move away from traditional brokerage models, in which commissions are charged per transaction, to fee-based platforms, where clients pay advisors a percentage of the total assets managed. The aligning of advisor-client interests has increased the demand for cost efficiency, transparency and asset allocation—all of which have helped drive ETF usage.
2. It has been a great time to be an investor. The leap in flows last year was strongly influenced by general bullishness on the global economy. For the first time in years, growth is occurring across virtually every region, lifting prospects for earnings. As the appetite for stocks broadens, many investors have turned to ETFs as a simple way to access markets around the world. U.S. investors even overcame their habitual home country bias: in addition to the $180 billion flowing to U.S. stock ETFs in 2017, $118 billion and $42 billion went to developed non-U.S. and emerging stock markets, respectively, according to BlackRock.
3. Finally, the increased adoption of ETFs signals a tipping point, not just in the size of the ETF universe but in how people are using these versatile tools to build portfolios and pursue financial goals. Investors have known for years that ETFs can help them seek out the market return. They are now recognizing that they can also target specific outcomes and asset classes, like factors and fixed income. Our Pulse survey found that in additional to broad index exposures, ETFs are being used to invest in sectors (37%) and single countries (25%), and that nearly two-thirds of investors believe that combining actively managed funds and index ETFs are the best approach to building a portfolio.
Importantly, none of these forces exists in isolation. They are building on each other and rapidly changing how we invest.
About the survey
The 2018 BlackRock ETF Pulse Survey was conducted from 22 August 2017 through 3 September 2017 by Market Strategies International, an independent research company. The survey interviewed over 1,000 individual investors from nationally representative online samples of household financial savings/investment decision makers age 21-75, with $100K+ in investible assets and aware of ETFs.
Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.
Investing involves risk, including possible loss of principal.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This document contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
Buying and selling shares of ETFs will result in brokerage commissions.
International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.
The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
The first U.S.-listed ETF, the SPDR S&P 500 ETF (SPY), recently turned 25 years old. Nate & Conor recount the backstory on SPY and Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors, offers his unique perspective on ETF history.
The following was authored by Paige Kyle, Capital Markets Associate at WisdomTree.
One of the most common questions and discussion points we encounter is: “What are the key differences between exchange traded funds (ETFs) and mutual funds?” Both are investment vehicles designed to give the investor exposure to a basket of securities, but there are important distinctions between the two structures in terms of transparency, trading and tax efficiency. Our CEO, Jonathan Steinberg, likes to use the analogy that mutual funds are like black-and-white TVs and ETFs are like HDTVs in full color.
The first key difference between ETFs and mutual funds is transparency. The holdings of ETFs are published daily, so as an investor, you know exactly what you are holding. Mutual fund holdings are published quarterly and usually on a lagging basis. By the time the holdings are published, what the mutual fund actually holds could be quite different. Furthermore, ETFs are much more transparent in terms of trading costs. The ETF buyer or seller bears the trading cost without impacting other investors of the fund. Additionally, the trading costs are imbedded in the ETF spread, which the buyer or seller pays, plus commissions. For mutual funds, the costs of inflows and outflows are borne by all holders of the mutual fund. Any trading activity that occurs in the portfolio, such as trading to accommodate daily inflows and outflows, will impact those who hold the mutual fund. In terms of fees, many mutual funds have sales loads, 12b-1 fees and trading costs that are not transparent since they are not exchange traded. Many investors think they are getting net asset value (NAV) but in reality, it is NAV minus the unknown trading costs.
The second key difference between the two products is trading. A mutual fund investor can only receive NAV minus costs of a mutual fund at the end of each day. An ETF can be bought or sold throughout the entire trading day. Additionally, since an ETF is exchange traded, that adds a further layer of liquidity. Shares of an ETF have the potential to be passed back and forth on exchange without a transaction occurring in the underlying securities. This can potentially lead to cheaper costs compared to trading the underlying basket. This does not happen with a mutual fund. The portfolio manager will always have to transact in the underlying securities when buying or selling for an investor, especially in larger size.
The last key difference between mutual funds and ETFs is tax efficiency. While both structures are taxed equally on the individual level, the key difference occurs at the fund-holdings level. At the end of the year, if the fund had netted gains from selling securities, this amount must be distributed to the fund’s shareholders, who are then required to pay taxes on this distribution. ETFs are more tax efficient on the fund-holdings level due to their exchange-traded nature. Shares of the ETF can be passed back and forth on the exchange without creating turnover in the underlying portfolio, thereby reducing the chance for capital gains. The second contributing reason is due to the “in-kind” creation and redemption mechanism. Securities and ETF shares are exchanged between the authorized participant and the ETF issuer during a creation or redemption, free of payment, meaning no transactions occurred within the portfolio. Mutual funds have neither of these benefits, making them more prone to taxable events.
While ETFs and mutual funds are both a wrapper around a basket of securities, there are many key differences. ETFs provide much more transparency, flexibility, tradability and tax efficiency compared to their mutual fund counterparts. The investor knows exactly what he or she holds, and all of the costs and fees are transparent. Furthermore, an ETF investor will not be impacted by the actions of other holders of that ETF, whereas a mutual fund investor is at the mercy of other holders of that fund. So in a world of technology, would you prefer a black-and-white TV or a flat-screen color HDTV?
Important Risks Related to this Article
Neither WisdomTree Investments, Inc., nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax advice. All references to tax matters or information provided on this site [in this material] are for illustrative purposes only and should not be considered tax advice and cannot be used for the purpose of avoiding tax penalties. Investors seeking tax advice should consult an independent tax advisor.
Nate & Conor discuss the investment opportunities and risks surrounding the marijuana business and marijuana ETFs. Kris Monaco, Managing Partner at Level ETF Ventures, spotlights the index behind the recently launched ETFMG Alternative Harvest ETF (MJX), the first marijuana-focused ETF in the U.S.
