Happy 30th Anniversary to the ETF Industry

April 14, 2020

Deborah Fuhr, Managing Partner, Founder ETFGI*

The global ETFs industry celebrated its 30th anniversary on March 9, 2020 – 30 years since the listing of the first successful ETF – the Toronto Stock Exchange listed the Toronto 35 Index Participation Fund, known as TIPs. That ETF still exists today and is now known as the iShares S&P/TSX 60 index ETF XIU with assets of C$7.81 billon, now owned by BlackRock. The first successful ETF launch in the US, the SPDR S&P 500 ETF Trust ticker SPY, was nearly 3 years later on January 22, 1993 by State Street Global Advisors. SPY is the world’s largest ETF with $252.54 billion in assets under management.

ETFs and ETPs listed globally gathered net inflows of US$20.44 billion during March, bringing year-to-date net inflows to $119.13 billion which is higher than the $99.06 billion gathered at this point last year and are the 3rd highest year-to-date inflows. Assets invested in the global ETFs/ETPs industry have decreased by 11.1%, from $6.04 trillion at the end of February 2020, to $5.37 trillion at the end of March (source ETFGI).

During March Equity ETFs/ETPs listed globally gathered net inflows of $31.02 billion, bringing net inflows for 2020 to $69.00 billion, greater than the $36.16 billion in net inflows equity products had attracted at this point in 2019. Fixed income ETFs/ETPs listed globally reported net outflows of $26.88 billion during March, bringing net inflows for 2020 to $9.01 billion, lower than the $56.28 billion in net inflows gathered in Q1 2019. Commodity ETFs/ETPs reported $10.46 billion in net inflows in March bringing net inflows for 2020 to $19.99 billion, which is greater than the $864 million in net inflows in Q1 2019.

The past few weeks have been a challenging time for investors and the markets reacting to news on the impact of and the spread of the Coronavirus, the Fed surprising markets by lowering its key interest rate by half a percentage point on March 3, the results from Super Tuesday and the exit of candidates from the presidential race.

Recently ETFs have been tested and have proved that ETFs work as they should – we have had days with the highest ever trading volumes and have had large redemptions from high yield fixed income ETFs. All worked as they should. SPY the first S+P 500 ETF in the US had 6 straight days when it traded more than $60 billion.

Important to remember the majority of ETF trading is investors simply trading existing ETF shares with each other in the secondary market (like they buy and sell shares in a stock). While ETFs typically do account for around a quarter of daily trading volume on stock exchanges (secondary trading), less than 5% of underlying trading in shares is the result of ETF inflows or outflows (i.e. the primary market creation/redemption).

To keep the ETF price near their NAV, the APs must believe the NAV reflects the current value of based on the underlying holdings or only offer to trade for less. During times of market stress ETFs can provide a more real-time price for where the bonds are actually trading as opposed to the NAV which is set at the end of the previous day. That is why people say ETFs act as a price discovery tool.

The risk-off market environment in the last two weeks showcased the underlying strength of fixed income ETFs.

During Q1 2019 trading volumes in U.S. bond ETFs grew to $1.3 trillion compared to the $2.6 trillion traded in all of 2019.

ETF liquidity contrasted starkly with the underlying bonds. During the week of March 23, shares of iShares high yield corporate bond ETF, HYG, traded hands more than 168,000 times each day, while its top five holdings each traded an average of only 25 times a day.

In addition to robust exchange volumes, bond ETFs also saw large primary volumes that were handled in an orderly fashion in the underlying bond market. As an example, HYG saw $3.9B in outflows the week of 2/24, but bid/ask spreads and fund tracking remained tight throughout with no disruption to underlying bond trading.

The record trading volume demonstrates the acceleration of fixed income ETF utilization.

During March the Fed stated that under the Secondary Market Corporate Credit Facility, the Fed can buy assets of any exchange-traded fund that provides broad exposure to the investment-grade bond market – is another validation of ETFs as an investment product.

We expect ETF adoption to continue to grow across the full spectrum of investor types in the United States and globally with new types of products, and new uses of ETFs as alternative to buying individual securities, futures and other types of funds. Catalysts for growth include regulatory changes, the relative performance and cost of alternative products, growth in ETF model portfolios, SMAs, Robo-advisors and ETF strategists, and a growing acceptance that ETFs are a solution that can be used by most institutions, financial advisers, and retail investors.

* The views, information, or opinions expressed are solely those of the author and do not necessarily represent those of Intercontinental Exchange.