Exchange traded funds are dominating trading on American exchanges, and research suggests this trend is coming to European shores, although at a slower rate.
ETFs now make up 30% of all US trading by value, and 23% by share volume.
As more investors become dissatisfied with active funds and stock pickers’ performance, the shift towards index-tracking strategies and ETFs is accelerating.
Outflows from active funds has reached $1.2tn since 2007, while inflows into passive funds were over $1.4tn over the same period.
The Financial Times found that global inflows to ETFs averaged more than $12,000 per second in 2016. Due to tax and cost advantages, the trend was particularly advanced in the US and in equities, which, as an asset class, are easier and cheaper to structure ETFs around compared to other asset classes.
Last year seven of the ten most actively traded securities on US stock markets were ETFs. The Bank of America was the most actively traded security in volume terms, but was only narrowly ahead of the giant SPDR S&P 500 ETF Trust (NYSE: SPY), the $228bn fund that tracks the S&P 500 Index. ETFs that invest in gold, emerging markets, volatility and banks were also very popular.
In value terms, SPY was the most traded security, beating Apple, the most valuable company in the world, into second place. ETFs tracking the Russell 2000 Index and the Nasdaq were third and fourth on the list.
In Europe ETF and ETP trading activity is also growing. On the London Stock Exchange (LSE) alone, trading value in December grew by 63.5% compared to December 2015.
Further figures show that in December, ETF and securitised derivative trading equated to 7.6% of all trades on the LSE order book over that year so far, compared to 6.1% in December 2015, both in terms of value.
As trading has grown, so has the number of ETF launches.
Despite arguments from industry participants and active managers that ETFs dominating market trading would not work – Bernstein & Co said passive funds were “worse than Marxism” – active houses continue to launch passive funds to ensure they keep up with investor trends. There are almost 2,000 ETFs in the US and more than 1,500 in Europe.
If stock pickers continue to disappoint and ETF fees continue to fall, the trend towards greater ETF adoption is likely to continue. While the average, asset-weighted fees of US equity passive funds hover around 0.20%, according to Morningstar, in Europe there is some catching up to do. Deutsche Bank found the average, asset-weighted fees for overall equity ETFs stands at 0.31%. However, in Europe there are very cheap choices for mainstream equity ETFs, too. The Source S&P 500 UCITS ETF (LON: SPXS) costs just 0.05%.