A recent report issued by CA Indosuez revealed that the ETF market totalled $3.5tr in assets under management in 2016, representing a rise of 90% in five years and approaching 5% of total global assets under management.
According to the report, the number of ETFs in the world was close to 4,400 at the end of 2015, up nearly 50% from year 2000.
The EFT assets under management are overwhelmingly invested in US equity. The second largest asset class is international equity, followed by US fixed income. Commodities then come in fourth place, followed by international fixed income.
Funds of various shapes and forms allow investors to do this in an efficient way, while single stock or bond investments might not achieve the same degree of diversification depending on the size of the individual investment portfolio. There is, however, an additional risk in the form of the issuer of the fund—the counterparty risk. Not only might the market fluctuate, but the counterparty could run into trouble.
Moreover, there is a concentration of ownership in the US stock market that deserves attention. Almost 12% of the S&P 500 was owned by ETFs as per the middle of 2016, according to the Wall Street Journal.
Passive investing arguably enhances these trends, and concentrating one’s assets in crowded trades is a high-risk strategy that tends to be accompanied by higher volatility than stocks with a lower concentration of ownership.
An index following ETF is a long-only strategy, and it includes the whole market in question, in the proportions dictated by the index. This is, generally speaking, a good strategy in a context in which the whole market is rising simultaneously. However, when one portion of the index is rising and another is falling, an active management might be able to stay clear of the part that is under-performing—an option that is simply not available to the passive fund manager.
