Exchange-traded funds race ahead of rival asset classes
The exchange-traded funds industry has outpaced other types of investment over the past five years. Assets held in ETFs – most of which are invested in funds that track equity indices – have leapt from $212bn at the beginning of 2004 to $711bn at the beginning of this year, according to Barclays Global Investors.
Over the same period, the global mutual funds industry grew from $14 trillion to $19 trillion, according to US industry body The Investment Company Institute. The hedge fund industry grew from $820bn to $1.4 trillion, marking a 70% rise, according to figures from Hedge Fund Research.
Private equity assets under management, including both invested assets and assets held in funds but yet to be invested – or “dry powder” assets – grew from $871bn to $2.2 trillion, according to alternative assets information provider Preqin. The rise marks a 252% increase.
Private equity real estate assets under management, again including both invested assets and dry powder, nearly quadrupled, Preqin said. But the market is significantly smaller than the ETF industry: assets totalled $102bn at the beginning of 2004, rising to $388bn at the beginning of this year.
Today, continuing inflows into ETFs have cemented the sector’s position as leader of the pack. At the end of last month, the industry managed $789bn. There are no definitive figures yet for other fund types, but they are expected to be substantially down, or at best flat, compared with their totals at the beginning of the year, due to a combination of struggling asset valuations and investors reluctant to commit money to riskier assets.
The first ETF was launched in January 1993. The SPDR 500, run by State Street Global Advisors, tracks the S&P 500 index. On July 7, its net asset value stood at $58bn. Most assets held in ETFs are in high-profile index trackers, such as the SPDR 500.
ETFs are popular because of their simplicity and low fees. They invest in a publicly disclosed basket of stocks and investors buy or sell the fund on an exchange like an ordinary share. The ability to create or destroy units of, say, 1,000 ETF shares in return for specie keeps the ETF share price in line with the index.
Some ETFs use swaps to provide the same return as the basket to which it is nominally linked, but the actual assets invested in the fund might be held elsewhere.
The funds are cheaper than actively managed investment vehicles which pay fund managers to decide on stocks in which to invest, and because the funds are tradable by anyone with access to an exchange, there are no charges to cover commission for financial advisers.
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