Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) have registered phenomenal growth since the introduction in 1993 of the first ETF – the venerable S&P 500 ETF (SPY), units of which are known colloquially as “Spiders.” Nearly a quarter-century later, ETFs are likely to be found in most portfolios, from retail investors’ five-figure accounts to institutional money managers’ multi-billion dollar holdings. (Related: ETFs Vs. Index Funds: Quantifying The Differences)

The exponential growth of ETFs can be attributed to their many advantages (discussed in greater detail later in this publication) – such as their relatively lower cost, transparency, tax efficiency and liquidity. But their very popularity is causing some angst about the potential negative effects of such near-ubiquity. Are ETFs really as liquid as they appear to be? And can the price dislocations between ETFs and their underlying baskets of securities experienced during short-lived selloffs – such as the “Flash Crash” of May 2010, and August 2015 – portend anomalous behavior that could prolong a bear market?

Figure 1 shows the tremendous growth in ETFs and ETPs (Exchange-Traded Products) over the period from 2005 to 2017. Globally, assets have grown from approximately $500 billion in 600 ETFs in 2005, to more than $4 trillion in over 5,000 ETFs by September 2017. ETF assets are forecast to grow rapidly for the foreseeable future. Participants in a 2016 PwC survey of ETF sponsors and managers, and asset management firms said they expected global ETF assets to exceed $7 trillion by 2021.

Figure 1: Global ETF and ETP Growth

Source: ETFGI.com