Seven Surprising ETF Trading Stats

by on January 25, 2010 | ETFs Mentioned:

One of the best sources of information on the state of the ETF industry is the monthly data download from the National Stock Exchange. While the most interesting numbers are generally the fund flows into exchange-traded products and the issuer “totem pole,” the release has some pretty thorough statistics on notional and share trading volumes. A closer look at the December version reveals some interesting insights about the ETF industry and sheds some light on a few interesting patterns behind ETF use among investors:

7. Trading Volumes Decreased In 2009

Excluding leveraged ETFs, the number of ETF shares traded declined from about 329 billion in 2008 to 312 billion in 2009, a puzzling statistic considering that the industry saw total cash inflows of almost $120 billion and more than 100 new product launches. Perhaps these numbers are more indicative of the extreme volatility and unique market environment of 2008 rather than a massive slowdown in 2009.

6. Last Year 480 Billion ETF Shares Worth $18.2 Trillion Changed Hands

These numbers are mind-boggling no matter how you look at them, and are perhaps the best indication of the tremendous rise in popularity of ETFs as an investment tool. ETFs now account for a significant portion of all trading on major North American stock exchanges, a trend that is expected to continue in coming years.

5. Leveraged ETF Assets Turned Over 164 Times In 2009

Using the average of beginning of year and end of year amounts as a proxy for average assets in 2009, the ratio of notional trading volume to assets is a whopping 164. The methodology behind this calculation obviously isn’t perfect, but it shows the impressive velocity of leveraged ETF trades.

We heard a lot in 2009 about potential abuses of leveraged ETFs by unsophisticated investors who didn’t realize the effect of holding these funds for multiple trading sessions. But looking at the numbers, it appears that the holding periods of leveraged ETFs are often measured in hours, not days or weeks.

4. Non-Leveraged ETF Turnover Was 2,200% In 2009

Even excluding leveraged ETFs, the turnover among exchange-traded products was remarkable in 2009. Many analysts tout ETFs as an ideal tool for buy-and-holders looking to minimize the impact of compounded costs on bottom line returns, but the numbers indicate that the vast majority of ETF use is attributable to more active traders. Although ETFs are often presented as an alternative to mutual funds, it seems as if the closest competitor may actually be individual stocks.

3. Vanguard ETF Assets Turned Over 3.5 Times In 2009

John Bogle, founder of the Vanguard Group and a pioneer of the ETF industry, has frequently lamented the fact that ETFs were originally designed for those with a long-term focus but have become so popular among active traders focusing on short-run alpha. Vanguard ETFs are best known for having the lowest expense ratios in the industry, so it is perhaps not surprising that the company’s funds also have one of the lowest turnover rates in the industry.

The ratio of notional trading volume to an average of beginning of year and end of year assets for Vanguard ETFs is 3.5. By comparison, annual turnover for iShares was about 12 times and more than 45 times for State Street (which was likely boosted by the high volume sector SPDR funds). Annual turnover of 300% is still high, but it seems that for buy-and-hold investors, Vanguard ETFs are the vehicle of choice.

2. Five ETFs Traded More Than 25 Billion Shares In 2009

The SPDR S&P 500 (SPY, 62.9 billion), SPDR Financial (XLF, 39.0 billion), PowerShares QQQ (QQQQ, 31.1 billion), Direxion Daily Financials Bull 3x Shares (FAS, 29.6 billion), and Direxion Daily Financials Bear 3x Shares (FAZ, 26.0 billion) all topped the 25 billion milestone in 2009, making them among the most-traded securities in the world.

The popularity of the Direxion leveraged ETFs is particularly impressive considering that FAS and FAZ weren’t launched until November 2008, and had aggregate assets of only $100 million at the beginning of 2009.

1. Merrill Lynch HOLDRs Turned Over 86 Times In 2009

Many investors view the line of Holding Company Depository Receipts (HOLDRs) from Merrill Lynch as oddball products that don’t quite fit in with the rest of the ETF industry. These funds are known for having significant concentration among relatively few individual components. The B2B Internet HOLDRs (BHH), for example, has only 2 holdings, and almost 90% of assets are in Ariba Inc. (the other 10% is in Internet Capital Group).

But these ETFs are among the most traded non-leveraged products, with an average holding period of only a few days.

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Disclosure: No positions at time of writing.