It seems the ‘new kid on the block’ is here to stay! When ETFs first burst on to the scene in 2007, there were 1,181 of them in existence worldwide. Ever since the 2008 crisis, they have continued to rise dramatically, reaching 4,396 in 2015. Combined ETF assets continued to increase, reaching nearly two-and-a-half trillion dollars by 2016, and the sector is expected to hit $7 trillion by 2021. That’s a newcomer worth taking note of!
An ETF has even been turned into an ETF itself. The ETF Industry Exposure & Financial Services ETF was launched in April 2017 and offers investors access to companies and providers who are driving growth in the ETF industry.
So what can their meteoric success be attributed to? We’ve examined four key factors:
Low cost – has got be one of the overriding reasons. ETFs are cheaper for the fund management companies to run which means lower annual ongoing charges for your clients than with an OEIC or comparable unit trust. Despite this, they still offer broad access to key world markets.
Transparency – it’s easy to see at a glance how the funds in a portfolio are performing. As we all know, the key to building a successful portfolio is to diversify. But to do that you need to know which stocks or funds a manager is holding – something that’s not always apparent with mutual funds. Part of the attraction of indexed ETFs is, therefore, that you know exactly what you are buying. Irrespective of the actual ETF, you can see a complete picture of its holdings on the ETF provider’s website or any number of independent financial websites. And these can’t be manipulated – as ETFs trade throughout the day, with the price flashing across computer screens across the world, there’s no settling of fund orders after the markets close: what you see is what you get.
Growth of passive – the rise of ETFs fits into the overall trend from active to passive to investing. Advisers have been impressed by the ‘passive’ exposure of ETFs as it gives them a huge selection. While many ‘active’ managers have struggled to beat the market in recent years, passive investing through ETFs has offered a viable alternative which outperforms on average and is a good way of avoiding ‘asset bloat’.
FCA-friendly – another key point in their favour is that the FCA seem to view ETFs favourably, firstly because of their transparent pricing and low cost, and secondly because this makes them accessible to a wider audience.