US ETFs have now pulled in close to $500 billion in new client this year.
This comes against the backdrop of a stock market flailing, with the S&P 500 down 19% thus far in 2022 and on course for its worst year since the Great Financial Crisis in 2008.
The size of the number is staggering. It will fall short of the record $935 billion that flowed in during 2021, but will surpass the previous record of $501 billion set in 2020. Both 2020 and 2021 were pandemic years, of course, with cheap money finding its way into asset prices around the globe like never before.
It does help put a more comprehensive picture on what exactly is happening in the markets. I published a piece this morning showing how the stock market’s losses have been masked by the dollar strength for foreign investors. Hence while these ETFs have pared back in dollar terms, for foreign investors, the return will not have been as bad.
There are advantages to ETFs which explain the surge and continue to make them attractive even during such market downturns. Tax advantages are common, while liquidity is generally strong and slippage and other fees low.
The ETF has begun to eat into mutual funds’ share, which typically charge higher fees. There are also more and more actively traded ETFs, further hammering the mutual fund’s relative attractiveness; previously, ETFs were only passive and hence active managers overlooked them (an in-depth comparison can be seen here).
Mutual funds trade only one a day after the market closes, whereas ETFs fluctuate all day in line with the market.
Looking at funds worldwide, ETFs have been surging for the past 20 years, up close to 50X in 2021 from 2003.
The data shows that there remains lots of money floating around ready to be deployed, despite the downturn in markets. We have now transitioned to a new paradigm – gone are the days of zero interest rates, mass quantitative easing and an up-only environment where seemingly every financial asset was printing positive returns.
Markets have pulled back as the Fed has been forced to fight tooth and nail against inflation. As we enter winter, we face a terrifying energy crisis, while the tragic war in Ukraine wages on, throwing all sorts of macro variables into the mix which only adds to the uncertainty.
ETFs, however, continue to receive more and more cash.
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