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An important milestone for Exchange-Traded Funds (ETFs) is fast approaching as low-cost, index-tracking ETFs become even more popular than the underlying stocks these indexes hold!
In fact, total transaction volume in the S&P 500 index-tracking ETFs is poised to surpass the combined volume of ALL the underlying stocks included in the index for the first time in history.
This landmark event shows just how much mainstream investors have embraced ETFs as an easy-to-trade, low-cost alternative to managing a portfolio of individual securities. And this has huge long-term implications for financial markets, as well as for the professional money management industry.
According to transaction data reported by Bloomberg, total dollar volume in three of the top ETFs tracking the S&P 500 Index — the SPDR S&P 500 ETF (SPY), the iShares S&P 500 Index (IVV) and the Vanguard Index Funds (VOO) — averaged nearly $30 billion a day last month … almost on par with total trading volume in all 500 component stocks combined.
Money Flows in Favor of ETFs
Being an avid ETF investor myself for many years, I’m not surprised to see this day come. And frankly I’m surprised it didn’t happen sooner.
Big money has been pouring into ETFs for years, with inflows actually on the rise despite — or perhaps because of — the volatile markets we’ve witnessed since the 2008 financial crisis.
Even as traditional mutual funds hemorrhaged assets in recent years, with individual investors redeeming hundreds of billions in mutual fund shares, the ETF industry has continued to enjoy robust inflows.
In the past 12 months alone, investors have added a net $160 billion to global ETF assets.
Keep this in mind the next time you hear the media tell you how individual investors are abandoning the stock market in droves … that’s not quite right. Rather, they’re simply pursuing a different kind of stock ownership, using ETFs rather than buying mutual funds or picking individual stocks on their own.
And for good reason …
Macro-economic factors have been dominating financial markets, much more than ever before.
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| Macro markets are a stock-picker’s worst nightmare. |
Whether it’s the European debt crisis, the approaching U.S. fiscal cliff, or central bank policy decisions … the fact is stocks are moving much more in lockstep with the direction of the overall market these days.
We’re seeing a much tighter correlation in movement — both up and down — among asset classes and individual stocks than has traditionally been the case.
In other words, the added value typically associated with stock-picking in the past, which was based on the fundamentals of individual companies, simply hasn’t worked well in recent years.
And so …
The Advantages of ETF Investing
Are Plain to See in this Climate
Lower costs and fees
Actively managed U.S. mutual funds carry an average expense of 1.4 percent per year — a big chunk of this is higher management fees. By contrast, ETF expenses are about two-thirds cheaper, with an expense ratio of just 0.5 percent on average!
Better performance
Just 13 percent of actively managed mutual funds are beating their benchmark by enough to cover the extra management fees they charge. Compare that to the three S&P 500 index-tracking ETFs mentioned above (SPY, IVV, VOO), and you’ll find they have almost identical performance to the benchmark — with an average tracking error of just 0.05 percent!
Convenience
For my money, there’s no easier way to get instant asset allocation to large-cap U.S. stocks — or nearly any sector or asset class, for that matter — than by making a single transaction in SPY, as opposed to purchasing hundreds of individual stocks to replicate the same strategy.
Bottom line: In a market climate where risk-on/risk-off has been the dominant theme, most assets rise or fall together. As a result, it’s become more difficult for even the most experienced money managers to earn enough “alpha” (extra risk-adjusted return) to justify the higher expense and risk they’re taking with your money.
That’s why, in many cases, ETFs may be the better choice.
Plus, ETFs provide the easiest way to get your portfolio in or OUT of an entire market or asset class quickly and easily with just one trade … a definite plus in today’s fast-moving markets.
Add up these advantages, and it’s really no surprise why ETFs are quickly becoming the tail that wags the stock market dog!
Good investing,
Mike Burnick
P.S. In my International ETF Trader service, I help members profit from ever-changing global market conditions by identifying which ETFs have the most profit potential at any given time. Click here to learn how you can join them, RISK-FREE.
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.