The State of the ETF Market

Many of my clients and readers understand my general preference for exchange-traded funds (ETFs) over mutual funds. It isn’t that I doubt the ability of any active mutual fund managers to outperform their benchmarks—plenty of them do. It’s just that if I have to pick an overall methodology to follow in my practice, I’d rather stick to the low-cost, transparent nature of ETF investing over buying actively-managed mutual funds. Back when I wrote my book in mid-2007, ETFs were graduating quickly from speculative tools to core holdings, a trend that really started in 2005. Nowadays, we can see in the constant release of fund flow data by companies like TrimTabs and Barclays (BCS) that ETF investing is growing at a rapid pace while mutual fund outflows have been consistently heavy. Part of that is obviously due to investors sidelined by the recession, but the other part is the financial advisor channel quickly catching onto the benefits of ETF investing.

Each year across the street from my office Capital Link hosts the Closed-End Fund and Global ETF Forum. It’s always fascinating to see how much this conference grows year after year. When I went for the first time in 2005 it was practically a one-room discussion between 40 or 50 industry guys. This year it attracted 722 people, a confirmation of this conference as an important destination to discuss various ETF and closed-end fund trends.

Deborah Fuhr of Barclays Global Investors gave us some updated stats as of March 31st, 2009. At that point, there were 1,635 ETFs (wow!) with total assets of $633.55 billion from 87 different providers listed on 43 exchanges around the world. In 2009 alone, 66 new ETFs have been listed with improving trading volume and marketability. iShares remains the largest provider of ETFs with 369 and assets of $269.8 billion. State Street was 2nd, followed by Vanguard. In reality, we’re still nowhere near the multi-trillion dollar mutual fund industry, but I find it quite possible that ETF assets exceed $1 trillion by year-end.

On the topic of closed-end funds (CEFs), Mariana Bush of Wachovia Securities chimed in and pointed out that spreads between the closed-end fund trading prices and their net asset values have been narrowing during this recent period of strength, whereas spreads widened during the precipitous market declines earlier in the year. As many investors know, closed-end funds trade on exchanges like stocks but alienate some investors due to their ongoing discounts and premiums to net asset value. Mariana pointed out that leveraged closed-end funds often account for this dramatic spread which may narrow further as fund managers take on less leverage and become increasingly realistic about their total return expectations. Personally, I think the space has more opportunities than most investors realize, especially in improving markets such as the one we appear to be in. Obviously investors should do their homework in terms of exploring the costs, expenses, liquidity, safety, etc, before jumping into any investment product.