In December, ETF Database published a list of the most successful ETF launches for 2011. I decided to update that analysis through the end of January 2012 using IndexUniverse fund flow data and made an interesting discovery: Of the 18 new ETFs that attracted more the $100 million last year, there was only one new ETF last year that attracted $1 billion through 1/31/12, the iShares High Dividend Equity ETF (HDV).
In fact, of the 18 ETFs on the ETFdb list, only two others gathered more than $500 million through the end of January: PowerShares S&P 500 Low Volatility ETF (SPLV) and Vanguard's Total International Stock ETF (VXUS).
As investors, we generally care about ETF "success" because larger ETFs tend to lower our trading costs through tighter bid/ask spreads, but if you're following the success of ETFs overall and believe they have the potential to continue revolutionizing the overall investment industry, a single ETF reaching $1 billion before it has even had its one-year anniversary is big news all on its own.
Before we get to why HDV has been such a standout in its first year, it's worth pausing for a moment on ETF "success" from a commercial perspective. In its most recent report on the ETF industry, McKinsey defines success as reaching $100 million in the first year after launch and also noted that the number of first year successful ETF launches has been declining over the past five years, as many more new ETFs are developed. According to McKinsey, in 2005 there were about 75 new ETFs that reached $100 million compared to last year's 18 that passed that milestone.
Let's put aside for the moment whether $100 million in the first year is even the right yardstick to judge success. Given the dispersion of expense ratios now from less than 10 bps to upwards of 150 bps, obviously there are different asset levels where sponsors would define commercial success and some great ETFs just need a little more time than others to get the attention of investors.
With that said, it's clear that in a more competitive ETF environment (there were 45 ETF sponsors in 2011 compared to just four a decade ago) where most of the major "building block" ETF exposures already exist, there will likely be fewer new ETFs that cross the $100 million mark as quickly, which is why a new ETF like HDV reaching $1 billion so fast is worth noting, as it says a lot about both high quality ETF manufacturing as well as perhaps a tipping point in investor preferences for low cost passive investments where they might have chosen mutual funds or individual stocks previously.
Why has HDV been such a rock star in its first year? Well, two reasons I think. First, back to the high quality manufacturing: HDV delivers exposure to a well engineered index from Morningstar that through a series of quality screens delivers both a higher yield and historical performance that's beat the broad market and value style over the past six years.
Second, dividend-paying stocks remain popular particularly relative to low bonds yields (in some cases even negative real yields) and as I've blogged about previously if you want to build a high quality dividend stock portfolio, why not also take advantage of the tax efficiency of an index-based approach offered with all the other benefits of an ETF?
Keep in mind that all of this used to be the provenance of mega pension plans and other sophisticated institutional investors. The positive side effect of ETF's commercial success over the past decade is not merely lower cost and more tax efficient investment options for retail investors; it's that ETFs have attracted the attention of some of the industry's best institutional quality thinking and know-how that will find its way into the next generation of smart ETF design. And that's good news for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.