ETFs: Year in Review and Look Ahead

It’s been another great year for the ETF industry, with approximately $200 billion of inflows (so far) and a host of compelling products were launched often from new providers. We think these multi-year trends should persist in 2016 as well.

Nine of the ten largest ETF providers experienced net inflows year to date through November, led by iShares ($86 billion) and Vanguard ($66 billion); iShares is owned by BlackRock (BLK). Those two leaders managed eight of the ten most popular products (based on net inflows). S&P Capital IQ thinks these firms benefited from growing ETF adoption by advisors and self-directed investors toward low-cost plain vanilla, market-cap weighted products.

For example, Vanguard 500 Index (VOO) experienced $11 billion of inflows and offers exposure to the popular large-cap index for a modest 0.05% expense ratio. Meanwhile, iShares Core US Aggregate Bond (AGG) added $6.9 billion of fresh money. Exposure to Treasuries and investment-grade corporate bonds is obtainable for only 0.08%.

However, the two largest asset gathering ETFs were international equity products that provided protection from a strengthening U.S. dollar relative to the euro and the yen. WisdomTree Europe Hedged Equity (HEDJ) pulled in $15 billion in assets, while Deutsche X-trackers MSCI EAFE Hedged Equity (DBEF) added $12.8 billion. Unlike VOO and AGG, these were not previously widely held, but gained strong interest as investors sought to limit the impact as the European Central Bank weakened the euro.

Driven by the success of these products, WisdomTree (WETF) and Deutsche expanded their lineups throughout the year to include other investment styles. Examples include WisdomTree Europe Hedged SmallCap Equity (EUSC) and Deutsche X-trackers MSCI Australia Hedged Equity (DBAU).

Yet the ETF tent also expanded as a host of traditional mutual fund managers jumped into the market with fundamentally focused products. Goldman Sachs (GS) launched three ETFs between September and November, while John Hancock rolled out six in September. Goldman's suite uses proprietary indices focused on multiple factors, including value, quality and momentum, and can possibly serve as an alternative to S&P 500 index and MSCI EAFE focused products. For example, Goldman Sachs Active-Beta US Large Cap Equity (GSLC) has more exposure to consumer discretionary and less exposure to energy than VOO.

While S&P Capital IQ thinks that the traditional market-cap weighted ETFs should continue to dominate inflows in 2016, we are encouraged that investors have more choices to consider. We expect fundamental ETFs that focus on one or multiple factors will gain in popularity with investors that are already comfortable with the lower-cost ETF structure, but seek out products that are more akin to active management. However, given the variety of choices, we look forward to continuing to provide you with ongoing research about the performance, risk and cost factors of ETFs. We have rankings on 1,088 equity and fixed income ETFs, 129 more than we did a year ago.

To keep up with ETF trends, follow @ToddSPGlobal.

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