March 3, 2015    3 minute read

What’s Behind the ETF Boom?

   March 3, 2015    3 minute read

What’s Behind the ETF Boom?

Exchange-traded funds (ETFs) are investment vehicles that share many of the same features as mutual funds but trade throughout the day on an organised exchange like a share of common stock. A variety of styles allows buyer to customize their investment opportunities choosing in particular between passive or index ETFs, which typically aim to closely track their underlying index. Actively managed ETFs are typically managed to look for above-benchmark returns or to objectives such as income or total return. Among the benefits ETFs offer investors, intraday liquidity and lower pricing fees, together with trading flexibility and transparency of holdings are to be remarked. Moreover, ETFs trade like stocks making possible for investors to buy them on margin or sell them short, and have the added flexibility to use limit or stop-loss orders combined in many cases with the opportunity to use options strategies.

Last year the ETF industry accelerated its expansion worldwide in a record-breaking year, with inflows topping $338.3bn, up 36.1 per cent on the previous year and surpassing the $272.2bn record for inflows set in 2008, according to the consultancy of ETFGI.

One of the main causes for such a surge is inflow of the back off the many regulations aimed at stabilising the financial system after the 2008 crisis, which have noticeably reduced liquidity, making it more difficult to trade assets without affecting their prices. At the same time, low interest rates during these years held back large investors to dart in and out of investments, forcing them to consider new ways of trading assets. Thus, these investors have turned to ETFs, as well as a range of mutual funds and certain derivative products that make up for a lack of liquidity. In particular, ETFs exploit a network of banks and trading firms that allow investors to be instantly exposed to a wide variety of cheap assets.

BlackRock, who is the world’s biggest fund manager, is at the moment the leading ETF provider globally, and last year managed to gather an all time record inflows of $103.6bn. According to the company, more investors around the world are embracing the versatility of ETFs, whether for strategic buy-and-hold investments or as precision exposures to express views on virtually any market.

Following a rapidly growing interest from investors, many leading providers also intensified their efforts to educate their clients about “smart beta” ETFs, which try to move away from traditional market cap-based indices towards alternative strategies, focused on finding better returns and lower costs amid volatile markets.

The rapid expansion of the industry has not escaped the attention on those on the outside, which now plan to get involved and capture market share. Last year, for instance, WisdomTree, a US provider, acquired a majority stake in Boost, a London-based provider of leveraged ETFs, in a move aimed at expanding their European presence and signed a strategic partnership with BetaShares, the fastest-growing ETF provider in Australia. Whilst growth in this emerging subset of investment instruments continues to evolve, it will be interesting to witness the evolution of even more interesting ETFs and the firms at the forefront of such.

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