Why the ETF Boom Will Continue

The SPDR® S&P 500® ETF Trust (NYSEARCA:SPY) launched more than 30 years ago, paving the way for what’s been one of the most epic booms in the history of the financial services industry.

SPY’s debut marked the dawn of the U.S. exchange traded funds industry – one that now $7.32 trillion in combined assets under management across 3,165 products as of the end of the June. At its core, SPY is an index fund, meaning that when it debuted in 1993 it wasn’t the first of its ilk. Index funds had been around for some time prior to SPY’s debut. What SPY did, however, was revolutionize how investors, well, invest.

Often times in finance, words such as “evolution” and “revolution” can be seen as clarion calls and hyperbole. However, those terms are applicable to ETFs. An asset class once viewed as a 90s fad on par with grunge music has proven to be anything but a passing fancy. The above assets under management figure confirms as much.

Registered investment advisors have played integral roles in the growth of ETFs and that trend will continue in the years ahead as fees, income, portfolio diversification and more nuanced exposures become important to today’s increasingly sophisticated clients.

ETFs = Innovation

It’s not hyperbole to say ETFs are arguably the most innovative financial product that’s widely accessible that’s come along in recent decades.

“ETFs are a mashup invention: they’re funds that trade like stocks while offering the diversification benefits of mutual funds,” according to State Street Global Advisors (SSGA). “An ETF is a basket of securities that seeks to provide exposure to a broad or specific market segment. But unlike mutual funds, ETFs can be bought and sold in a single trade on an exchange throughout the day — just like stocks.”

ETFs made and continue making inroads with advisors and clients due to several traits that separate these products from mutual funds and index funds. Notably, ETFs, both active and passive, are akin to individual stocks in that they trade all day (during normal trading hours) on familiar exchanges and there is no minimum investment required.

Additionally, ETFs, on average carry lower expense ratios that index funds. That difference is 0.57% vs. 0.84%, according to SSGA. On the other hands, passive ETFs offer the best benefits of index funds, namely index tracking and portfolio diversification. In other words, ETFs offer “best of both worlds” characteristics with the two worlds being individual equities and index funds. So it’s no unreasonable to assert the industry’s current pace of growth will continue or even accelerate.

Data Bode Well for ETF Growth

Advisors know that fees are meaningful to long-term investors and that more clients are aware of this issue. That’s one reason why so many surveys and studies point to advisors saying they expect to increase ETF usage.

Given the importance of fees and the need to move some clients (boomers and older) out of individual stocks, the outlook for ETF growth is undeniable.

“Despite the explosive growth of the ETF industry over the past three decades, the global ETF industry still has a long runway for adoption, as just 40% of investors around the world say they own an ETF,” concludes SSGA. “This is considerably lower than investors’ ownership of stocks (77%), mutual funds (56%), and bonds (49%).”

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