ETF Trends - Volatile Market Alters the Playing Field


Despite the sharp market downturn, and declining asset values, exchange-traded funds (ETFs) have continued to gain assets. The value of the U.S. total market as measured by the Wilshire 5000 declined in value by 22.05% over the 6-month period from September 30, 2000 to March 31, 2001. Over that same time period, ETF assets under management grew by 31.14% . . . this in spite of the obvious slide in the value of their underlying assets.

Simply put, for ETFs business is booming. In just the last 6 months, ETF assets worldwide (not including HOLDRs) have grown from about $57.8 billion to $75.8 billion, a hefty 31% increase in assets won despite declining equity prices. From the beginning of 1998 to the end of 2000, assets under management in ETFs grew nearly tenfold. The first U.S.-based ETF, the S&P 500 SPDR (SPY) opened in 1993.

Year End
Assets (Millions$)

Source: American Stock Exchange, excludes HOLDRs

Part of the reason market direction and asset levels in ETFs are not necessarily correspondent is that unlike normal equities, ETFs can be shorted on a downtick. The net result is that in a down market, investor shorting of an index can actually spur net creation of ETF shares, since shares must exist if they are to be borrowed and sold short.

The best example of this phenomenon is the QQQ. While the Nasdaq 100 has slid a whopping 57.28% over the past 6 months, QQQ assets have nearly doubled over the same time period.

The other reason total ETF assets have grown is that an onslaught of new products has continued to hit the market. Holding their own in the battle for market share have been Barclays Global Investors (BGI) iShares. Though aggressive marketing, and with the help of an ultra-cheap S&P 500 fund (IVV), iShares are beginning to make inroads in market share. In addition, as noted above, QQQ (Cubes) has ridden the wave of its own demise to a tremendous increase in net assets.

The two charts below quantify worldwide ETF assets by manager at the beginning and end of the last six months.


Worldwide ETF Market Share as of 9/30/2000 (in $MM)

State Street Global Advisors (SSgA)=55.43%
Bank of New York (BNY)=26.67%
Barclays Global Investors (BGI)=17.29%
Source: State Street Global Advisors, doesn't include HOLDRs

Worldwide ETF Market Share as of 3/30/2001 ($MM)

Source: State Street Global Advisors, doesn't include HOLDRs

The following chart illustrates the worldwide growth trend over the previous 6 months.

Source: State Street Global Advisors, doesn't include HOLDRs

Note the dramatic change internationally. While the asset level is still relatively low compared to US ETFs, growth has been explosive. Assets under management internationally by managers other than SSgA and iShares have exploded by 470.34% over the past 6 months, thanks to a wave of new offerings by 8 different fund managers.

These international developments, combined with the continuing asset growth in the US, only serve to illustrate a trend which has seen exponential growth in ETF assets since their inception in 1993. Following is a chart that chronicles the boom, which really began in earnest in about 1995.


Source: AMEX


Whether or not all of the new products and the scores soon to come to market will survive remains an open question. Whether ETFs themselves will survive does not. Cheap, fast-trading, index-tracking ETFs are here to stay.