Long-Term ETF Asset Growth

Nov 07, 2010

Source: Blackrock

At first view, the # of global ETF products might seem like a lot at 3,257.   But consider that there are greater than 69,000 mutual funds in existence (globally).

Moreover, ETF assets total about $1.3 trillion vs over $22 trillion for the global mutual fund industry. In fact, the $1.3 trillion in global ETF assets is actually just a fraction of the amount of assets that the mutual fund industry has lost in recent years when it peaked in 2007. That makes for roughly -$4 trillion in change versus the $26 trillion in assets of a few years ago.

I have spoken to a number of professional money managers regarding ETF’s. My impression is that the market has enormous room to grow as many managers I speak with are still not using ETF’s in any way. 

In the cases where they are, why are they doing so?

1. A particular market segment is attractive but there is no information edge to justify individual security-selection. Especially relevant in international and/or emerging markets.

2. Liquid access to non-correlating asset class exposure (Gold, Aggregate Bond Index, TIPS, Commodities)

3. Add Yield to portfolio (preferred stocks, inv-grade/ high-yield bonds, emerging market bonds, MLPs, high-dividend ETFs, and/or high-dividend sector ETFs, etc)

4. Alter portfolio beta to enhance return

5. Diversify with some non-correlating indexes that complement an otherwise concentrated list of best ideas

6. Reduce administrative burden of smaller separate accounts – rolling cash from maturing bonds across long lists of accounts is time-consuming and very low in terms of possible alpha from this task.

7. Macro Calls – express tactical views based on changes in the marco outlook for various market segments (global or domestic).

8. Hedging late in the calendar year with a short (or inverse) position – rather than selling longs --- in order to avoid taxable gains in the current year.

9. Liquidity – try selling individual muni or corporate bonds through a broker and see the bid/ask spreads you are quoted.

10. Pair Trading. Shorting a sector within a list of long individual stocks.

11. Shorting very low yielding long-duration treasuries

Interesting note:

Hedge funds generally wouldn't be caught dead owning a mutual fund in their portfolios.   However, while still a small percentage in terms of penetration -- many hedge funds have rationalized using ETFs (long and short) in some way.

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