ETF Industry Size and Scope

by: Richard Shaw

As of November 30, 2005 the Investment Company Institute reports this census of ETFs in the United States:

etf industry

Those ETFs had total assets of $396.7 Billion which compares to total mutual fund assets of $10.3 Trillion and closed-end fund assets of $285.8 Billion.

ETFs and closed-end funds are on a par with each other based on assets, and each is less than 1/25th the asset size of mutual funds.

Only 113 of the 220 ETFs followed by Morningstar have a 3-year history, and only 44 ETFs have both a 3-year history and at least 100,000 shares traded daily.

Assets are distributed, $275 Billion to domestic equity ETFs (69.3%), $102 Billion to non-domestic equity ETFs (25.6%) and $20 Billion to bond ETFs (5.1%).

As of January 8th, Morningstar publishes data on 220 ETFs, only 140 of which have daily volume over 100,000 shares, which might be used as an arbitrary cutoff of a liquidity standard. We emphasize that is an arbitrary number, but still one we like.

There are lots of interesting ideas out there in ETFS, but only a few that have the maturity in terms of asset size, liquidity, and performance history that makes us comfortable. Much more maturity is required for the large field of ETFs to be fully useful in portfolios.

We anxiously await more ETFs to mature, because it is the granular specialty ETFs that will make index outperformance through ETFs most feasible.

Generally, people don’t have the time or patience to research down to the single company issue level and would be better off buying baskets of securities with similar characteristics. That’s where ETFs come in, but investors need to be able to deviate significantly from indexes in order to beat them.

Since there is much evidence that choosing the correct asset class, sector, industry or country contributes far more to returns than single issue selection, ETF baskets are a wonderful tool. However, the choice of ETFs with mature characteristics needs to enlarge to create adequate good opportunities for active sub-index allocations to be implemented with confidence that the exit doors will be open when needed.