As we head towards the finish line of 2010, the ETF industry finds itself in an interesting position. Regulatory scrutiny has intensified, leading to significant uncertainty over the future of certain product development initiatives. Active ETFs continue to generate hype, but little in the way of assets. Investors have fully embraced bond ETFs, which now account for much of the growth in the industry. A series of “price wars” has kicked off, with some unexpected issuers joining in the fray (more on this below). The list could go on and on.
The competitive landscape continues to change from week to week, with more issuers than ever before battling for pieces of a pie that is still growing, but at a much slower rate than it once was. A quick look at the recent ETF industry statistics from the National Stock Exchange reveals the same old trends; cash continues to come through the door, with a relatively small number of issuers and tickers accounting for the vast majority of total ETF assets.
But a closer look at the numbers reveals some more interesting story lines. Below, we run through ten of the more intriguing head-to-head match-ups, investing trends, and other developments in the ETF industry at the end of July [for more ETF insights, sign up for our free ETF newsletter]:
10. ETFs Break Through
At the end of July there were 441 ETPs with at least $100 million in assets, representing about 43% of the ETP universe. In absolute terms, that represents a big increase; a year ago only 367 ETPs had crossed the $100 million mark. That should give hope to the smaller funds out there; dozens of smaller ETFs have gained a critical mass over the last year. The big funds may be the targets of most inflows, but several funds have worked their way up to become big players in the space.
9. Emerging Markets Dominate
It’s been said that the impressive growth in ETF assets in recent years has been driven not by duplication but innovation; many of the new fund launches are first-to-market ideas. That may be true, but at the top of the industry there’s plenty of duplication; the six largest ETFs by total assets include two funds tracking the S&P 500 Index and two tracking the MSCI Emerging Markets Index.
Cash inflows into these two big emerging markets ETFs (EEM and VWO) topped $3.5 billion in July, representing more than a third of total industry inflows on the month. Clearly, investor interest in emerging markets remains high.
8. The Big Short
On the heels of an impressive July rally, investors seemingly don’t have a whole lot of confidence in the sustainability of the recovery. Cash inflows into short and short leveraged domestic equity funds approached $2 billion last month, suggesting that a lot of investors are betting on another dip. Among the most appealing funds is Direxion’s Daily Financials Bear 3x Shares (FAZ), which saw more than $250 million in cash inflows last month.
7. Volatility ETNs: Back In Favor
Another indication of uneasiness over short-term prospects for U.S. equity markets comes from a surge in interest in ETNs linked to the VIX. The “fear index” plunged in July as investors regained some of their appetite for risky assets. VXX, the ETN from Barclays linked to an index comprised of short-term VIX futures, lost 25% of its value during the month as outlook for equities apparently brightened.
But interest in VXX, which exhibits a strong inverse correlation with equities, surged during the month. The ETN saw cash inflows of more than $450 million, about a third of its end-of-month asset levels.
6. MINT’s “Volatility”
One of the most volatile ETFs in terms of total assets has, ironically, been a fund that is known for its limited price fluctuations. PIMCO’s Enhanced Short Maturity Strategy Fund (MINT), an actively-managed ETF that generally invests in short duration investment grade securities, saw a tremendous surge in interest earlier this year when equity market turbulence sent investors running for safe havens [see Five Safe Haven ETFs]. MINT’s assets skyrocketed from about $180 million in April to nearly $800 million in May [see How MINT Raked In $800 Million].
But in recent months MINT, which is the closest thing to a money market fund in the ETF industry, has staged a great disappearing act; July saw more than $300 million in cash outflows and now has less than $350 million in total assets. This seems to indicate that the appeal of safe havens has diminished considerably, contradicting the big uptick in interest in volatility ETNs and ETFs offering short exposure.
5. Commodities Fall Out Of Favor
In recent months, commodities have been one of the big drivers of growth in the ETF industry. In 2009 more than $30 billion flowed into exchange-traded commodity products. Through the first half of 2010 another $7.5 billion came in the doors. But July saw a sharp reversal of this trend; commodity ETPs saw outflows of more than $1.6 billion on the month.
These numbers certainly don’t mean that the commodity ETF boom is over. More likely, investors sold off commodity positions in favor of equities as risk appetite returned. Evaporating inflation concerns also didn’t help matters; many investors had established commodity positions as a way to protect against a big uptick in prices [see Beyond TIP: 10 ETFs To Protect Against Inflation].
4. GRV: Active ETF Star Is Born
To this point, most actively-managed ETFs have been relatively slow to gain traction with investors. A few of PIMCO’s active bond funds have been big hits (including the aforementioned MINT), but equity funds have struggled to accumulate material assets.
Last month AdvisorShares rolled out its second actively managed equity ETF; the Mars Hill Global Relative Value Fund (GRV). This ETF seeks to implement a market neutral strategy consisting of long positions in the most attractive regions and short positions in the least attractive regions [see GRV Hits The Market]. Just when some investors were giving up hope on active ETFs, GRV came flying out of the gates. Inflows for July were $40 million, making GRV the largest actively managed equity ETF less than a month after its inception.
It remains to be seen if GRV’s initial success is a sign of brighter times ahead for active ETFs or a one hit wonder (we strongly suspect the former). Coming months should see no shortage of active ETF launches, so GRV will have plenty of competition for retaining its top spot in the active ETF space.
3. Currency ETFs: Past Their Prime?
Currency ETFs account for a relatively small portion of the ETF industry–and that piece of the pie is shrinking. Cash outflows from currency ETFs in July topped $550 million, bringing the year-to-date total outflows to more than $2.5 billion. It’s tough to tell exactly what’s behind this fading interest in currency products. The race towards risky assets in July likely explains some of the outflows last month, but interest in currency funds has been declining consistently throughout 2010.
2. Global X: An Issuer On The Verge
Compared to some larger issuers, the $101 million in cash inflows to Global X funds in July is a drop in the bucket (iShares and Vanguard saw nearly $10 billion in aggregate inflows). But no other issuer demonstrated a more impressive growth rate than Global X in July; the $101 in inflows represented more than 40% of the previous month’s asset totals. With a handful of ultra-popular funds in its lineup, the New York-based firm seems poised to make the leap into the middle tier of the ETF industry [see all Global X ETFs].
It will be interesting to track the firm’s progress in August; the recently-launched Lithium ETF (LIT) has been regularly churning out daily trading volumes in excess of 100,000 shares, and seems like a good bet to see a surge in assets in the not-so-distant future.
1. Gold ETF Showdown
One of the biggest (and most unexpected) stories from July was news that iShares was cutting the expense ratio on its gold ETF (IAU) from 40 basis points to 25 basis points. That makes the fund significantly cheaper than the much larger State Street gold fund (GLD has close to $50 billion in assets); it seems that iShares is hoping a more competitive cost structure will attract investors interested in precious metals exposure.
The early results are promising for the market leader in the ETF industry. GLD saw outflows of $1.4 billion, while IAU took in almost $200 million. There’s still a big gap between the two most popular gold funds (almost $45 billion to be exact), but IAU has certainly gained some ground. Of course one month of data isn’t a sufficient sample size to gauge the impact of the expense ratio cut, but it will be interesting to track the assets of these two funds in coming months [see Guide To Gold ETFs].
Disclosure: No positions at time of writing.