ETFs, or Exchange-Traded Funds, are taking the investment world by storm. They are an increasing staple in many investment portfolios, serving as proxies for the indexes they usually track, and making for easy diversification. During 2012, as per US Lipper Fund Flows, equity investment funds saw an outflow of $18.1 billion, yet ex-ETFs, this outflow was $129.2 billion, which means that equity ETFs actually had inflows of $111.1 billion.
This has been an ongoing trend, and one that's expected to continue due to the ETFs' unique advantages, such as:
- Low management costs/fees, made possible by their usually passive nature, similar to traditional index funds. ETFs usually just have to track an underlying index, and this doesn't require much in the way of analysis or expensive trading.
- Fewer transaction fees impacting the fund, again due to the passive and low-turnover nature of the index-tracking activity.
- Liquidity and flexibility. Since ETFs trade on the exchanges, they can be bought and sold all day long, instead of having specific times for being subscribed/redeemed. This can also mean lower fees since there's no subscription or redemption fee.
- Higher tax efficiency, stemming from the low turnover induced by the passive index-tracking nature.
- Outperformance over time versus mutual funds. This is a result of the fact that ETFs usually act as index funds with low costs. Since the indexes tend to outperform higher cost mutual funds, the ETFs tend to do the same.
Given these advantages, it's very likely that the ETF boom still has a lot of room to run. Indeed, just today, the same thesis was put forward at IndexUniverse's 6th annual Inside ETFs conference. Here, ETFs were said to have just a 3% share of the investing world, and thus significant room to grow, along with the certainty of growth.
This begs the question, how can one invest in players that might benefit from this huge trend? The best way would be to seek out managers of popular ETF fund families. Let's go over some of the major ones in this category.
BlackRock (BLK) bought the entire iShares complex from Barclays back in 2009 for a full $13.5 billion. This shows that the value in these fund families was already quite recognized. Right now, BlackRock trades for a market capitalization of just under $41 billion and yields 2.8%. BlackRock has more than doubled since buying iShares back in 2009, and now trades at 15.3 times 2013 estimates earnings and 1.64 times book value.
PowerShares is a division of Invesco Ltd. (IVZ). PowerShares QQQ (QQQ), tracking the Nasdaq 100, is the best known of PowerShares' ETFs. Invesco trades with a $12.5 billion market capitalization and is yielding 2.5%. Invesco trades at a price/book of 1.5 and a forward 2013 P/E of 13.6 times, slightly cheaper than BlackRock's.
The "Spiders," of which the SPDR S&P 500 (SPY) is the better-known name and also the largest ETF in the market, are a division of State Street Corporation (STT). State Street trades with a $26.1 billion market capitalization and is yielding 1.7%. State Street trades with a price/book of just under 1.3 and a forward 2013 P/E of 13 times.
With the ETF boom set to continue, BlackRock, Invesco and State Street Corporation might make decent candidates to hold and profit from this investment trend. Invesco and State Street seem especially enticing when taking into account the dynamics and their relative valuation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.