ETFs Did Not Have a Tough Last Year as Is Claimed

ETFs

We might want to think that seeing less new ETFs introduced last year, as well as a higher percentage of them closing, might not look so good for ETFs. Think again.

The 2010s were definitely the decade of the ETF, as they made up a huge amount of ground over mutual funds and are now poised to take the crown. Some think that the lackluster amount of net new ETF funds that we saw last year is cause for concern, but this is actually neither unexpected nor necessarily a bad thing.

ETFs have traditionally focused on index funds, and with index funds growing as they have over the past few years, this has certainly well positioned them to ride this pony to success. While interest in actively managed funds has dwindled, this still represents a big chunk of the overall market and is one that ETFs are just now starting to get their feet wet with.

The thing about index funds is that there is less opportunity for diversity than with active funds, which have an unlimited potential. You can put together unlimited combinations of assets, but if you’re looking to just replicate indexes, the variety of this is much more limited.

When we speak of the growth of a certain type of fund, we do not really speak to how many different funds of a certain type that there are out there, and monitor progress by how many of them there are at a certain point and how this number has changed, we instead look to funds under management to keep score.

This is the real key to understanding how the ETF market as a whole is doing, and when we see that net new funds have dropped to 120 in 2019 from the 162 funds we saw added in the year before, this should not in itself have us even worrying.

To see it that way would be like looking at how the number of stocks out there in the market changes and then try to predict if people are putting more or less money in them overall. If the task actually were to see which type of asset has the most things to invest with, then this would matter, but that’s not what we mean by growth or lack of it.

The number of funds offered by ETFs is bound to reach a saturation level, and based upon last year’s numbers, such a thing may be at hand now. While the number of funds may be declining, this does not mean that people are investing less, and we can see both more money being invested and seeing this put into less funds than before.

It’s not even that the number of funds out there is dwindling, as we did add this extra 120 funds last year. That in itself points to more growth, not less, and even though the growth rate here may be slowing, this is to be expected as a type of investing becomes more and more popular. With each year, there will be less things that you can start up a new fund with, and you reach a point where this number represent a smaller and smaller percentage of the total number.

All we have to do is look at the numbers for total assets under management to get a real idea of how things are going. What we want to see here is actual growth, and how this growth measures up to past years should not even be a concern, because after all, we are grading all this based upon total assets, not the growth rates of it.

ETFs Have Grown Nicely in 2019

The numbers are in for 2019, and in spite of what has been a weak year for retail investing in general, with significant net outflows from stocks overall, ETFs have continued to grow. The entire ETF market grew by 7% last year. This was led by a growth of 17% with U.S. fixed income ETFs, as a result of the very bullish bond market last year.

With this now in decline, we may expect that this growth will slow down and even reverse depending on how much we give back in 2020 with these investments, with the likely beneficiary being stock ETFs which only grew by 5% last year.

Inverse ETFs have picked up even more and 2019 saw a 50% increase in money held in these investments, which go up in value when the index that they track goes down. This allows us to more easily profit during downturns in prices, and brings the benefits of short selling to the masses.

Inverse funds still lag way behind funds that are on the long side of indexes, and even after this big of a leap, they still only hold a quarter of a percentage of overall funds under management. The fact that this is still growing after such a big year on the upside does tell us that there will be a lot more where that came from if stock markets turn sour and they actually become a much better idea.

We already have this situation with bonds though, and while not many investors ever even think of going short with bonds, and this is not something you could do on your own anyway unless you trade futures, people who favor bonds would be considerably better off looking to play the inversion that is underway rather than trying to buck it by staying long.

Inverting stock indexes is at least something that investors are more aware of, and with this tool in our bag, this allows us to escape the clutches of the long side which we cling to whether this is a good idea or not, while we pray for bull markets to keep going. Using inversion puts us in a position where we don’t care whether the bulls or bears are in charge, and you can make money even more quickly and even more reliably by being on the short side during downtrends.

For those new to this, it makes sense to get your feet wet with bonds rather than stocks, especially given that this strategy with stocks bucks the overall trend and therefore must be approached with more care. Bonds do not have any natural bias either way and just follow the winds of the market, which are currently blowing against them.

Bonds also don’t move anywhere near as much as stocks are, and there are few things safer than an unleveraged position in bonds, regardless of what side you are on. There is no real up and down here, just like there really isn’t with the Earth, and this leaves you with the task of simply playing the trend that is underway and getting off when it is over.

We Really Don’t Need to Grow ETFs Beyond this Anyway

How many people or how much money that is invested in ETFs doesn’t matter that much to investors, although more is better as this provides greater liquidity and the tighter spreads that this comes with. Those in the ETF industry are the ones that pay attention to these things, as they make more money when they handle larger amounts of it.

You can buy an ETF for just about anything these days, and the markets that ETFs haven’t penetrated yet don’t really amount to much on the index side of things anyway, since with so many out there already, we are really at the margin here. This is the main reason in itself why we are seeing a slowdown in growth of new funds, since funds cost money to set up and you need enough interest to justify this.

The further out we go with this expansion, the less interest there is, much like with gold mining where you mine the good stuff first and the marginal stuff later. There has to be enough gold per ton to make it worth mining, and with ETFs, the profitable veins have all but been mined.

The growth in active ETFs that have been talked about for years but is finally off the ground will add even more growth to the industry, as well as opening up the amount that there are, for those who should care about these things.

ETFs in themselves offer some real advantages over mutual funds, and this advantage will remain as the differences are structural. Trading your funds like a stock is obviously one that many investors like, but it is the better tax structure of ETFs that have it really standing out.

ETFs are not only here to stay, but can be expected to continue to grow both their total assets and their market share. They can be tools that can serve investors well by allowing them to more actively participate in the management of their portfolios, by bringing this all so much closer at hand, at the click of a mouse now.

This new power can be used for both good and bad, but this part goes to the abilities of the investor. There is no investment that is not a matter of strategy, and our goal is to shoot for the good ones and try to avoid the bad. This is the area that investors still have much to work on, but by placing the gun in their hand, in this case their mouse, those who wish to shoot it up for more fun and profit are at least better armed.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.