At the beginning of March, a raft of financial companies will have cause to celebrate. That marks the 30th anniversary of the listing of the first exchange traded fund (ETF). On 9 March 1990, trading in the TIPS started on the Toronto Stock Exchange. This was the abbreviation given to the "Toronto 35 Participation Fund". The TIPS is no longer available in its original form – it was merged with another ETF ten years after being launched. Nevertheless, the stock market in Toronto remains the birthplace of a real growth market. The industry has even stepped up the pace right on time for the anniversary. ETFGI estimates the capital sum managed worldwide by vehicles also designated as exchange traded index funds (assets under management, or AuM) at approximately USDtn 6.2. According to the data provider, AuM have jumped by almost two thirds within a year (see graph).
ETFs are popular because of their simple structure and low fees compared with active investment funds in particular. Less surprising is the boom in the USA especially: the States account for more than two thirds of global ETF assets. That is also where the largest providers are based. At the tip is BlackRock. Under its iShares label, the financial giant had USDtn 2.2 under management at the end of 2019. The number 2 is Vanguard – last August the ETF AuM of the US asset manager crossed the USDtn 1 threshold. The worldwide market share of State Street Global Advisors is also in the double-digit percentage range. The Boston-based company is a force in this business with its SPDR brand and is regarded as a pioneer: in 1993, barely three years after the TIPS mentioned above, State Street launched the first ETF in the USA with the SPDR S&P 500. The fund with the legendary code SPY still follows the leading US index today and, with AuM of just under USDbn 312, is the largest investment vehicle of its kind. View more information on investment solutions on the topic “ETF Industry: A rather passive growth market”.
ETF firms are not the only ones to have profited directly from the boom, however: every single one of the almost 7,000 passive funds listed worldwide is linked to a particular benchmark. To that extent the index providers are also flourishing, as they receive fees for the construction as well as the ongoing calculation and monitoring of the stock market barometer. This comprises either a fixed charge or income that depends on the AuM of the relevant ETF. According to an analysis by Burton-Taylor International Consulting, revenue achieved globally this way in 2018 totalled USDbn 3.5. That means indexing business has grown by 13.4% compared with the previous year. Three well-known providers dominate the market. In 2018 FTSE Russell, S&P Dow Jones Indices and MSCI together pulled in just under 72% of the fees levied worldwide (see graph). Their pre-eminent position ensures that this trio enjoys high margins. Nevertheless, smaller providers specialising in particular themes are muscling their way into the market. To save costs, a number of asset managers have also begun to create their own indices.
Even so, the index providers are certainly popular on the stock market. Take S&P Global, for example: the capitalisation of the rating, data and index provider that is likewise included in the S&P 500 has risen by more than half over a period of one year. Climbing 35%, ETF industry giant BlackRock also performed far better in the twelve-month period than the market as a whole. The continuing stock market boom is playing into the hands of both groups. Smart beta is another source of growth dreams. This is the tag for indices whose structure differs from the classic weighting based on market capitalisation. With the innovative benchmarks, the focus can, for instance, be directed at dividend-bearing shares, small caps or low-volatility instruments. The theme of sustainability – think ESG – is also something the ETF has discovered for itself. Of course, the potential outlined is already factored into the share prices to a certain extent. At the same time, a sea-change on the capital markets could bring the ETF industry to a halt. Shortly before its 30th birthday, however, there are no signs of this happening.
