The recent rise in popularity by exchange-traded funds (ETFs) has been on the build-up over the years. The growth culminated in all-time high figures in 2020 for both ETF assets’ value and the number of products.
According to data acquired by Finbold, the value of assets under management by global ETFs has soared 56.22% between 2016 and 2020 from $3.32 trillion to $7.99 trillion. One of the highest growth rates was between 2018 and 2019 at 32.6%, from $4.6 trillion to $6.1 trillion.
Elsewhere, over the five years, the number of ETFs globally also grew 56.22%, from 4,866 to 7,602. Between 2019 to 2020, the ETFs also surged 12%, to record one of the biggest growth rates over the period.
Drivers of ETF sector growth
Over the last five years, the growth of ETFs represents the sector’s underlying structure that has gained popularity among most classes of investors. The core value proposition of ETFs is low cost, transparency, tax-efficient and ease to trade, which has been the main driver in the sector’s growth.
Notably, both the value of assets under management and the number of ETFs hit their peak in 2020 despite the economic meltdown initiated by the coronavirus pandemic. In general, the health crisis impacted the investing world, with people showing interest in conscious investing, and ETFs provided one of the best avenues.
For example, environmental, social, and governance ETFs have gained prominence. During the period, investors also showed more interest in biotech, eCommerce, and cloud computing ETFs. Interestingly, these sectors are among the major gainers from the pandemic.
The pandemic’s reaction by most governments also contributed to last year’s ETF growth trend. Most central banks lowered interest rates and expanded bond-buying programs to stabilize financial markets in rolling out the stimulus plans. In regions like the U.S, the Federal Reserve opted for fixed-income ETFs to strengthen the bond market, a move that has acted as a major catalyst.
Our previous research indicated that the value of assets under management (AUM) by the ten largest ETFs had surged 47.56% between March 2020 and April 2021, from $1.14 trillion to $1.69 trillion. In just 12 months, the highlighted ETFs recorded an inflow of $546.63 billion within the last 12 months.
Role of millennials in ETF growth
ETFs continue to offer an opportunity for passive income, especially among millennials who have emerged as key players in the sector.
ETFs are more appealing to young people who find the traditional financial market more complex. Elsewhere, the ability of ETFs to build a diversified portfolio with relatively low investment amounts is appealing to young people.
Furthermore, the recent inflation worries have partly contributed to the growth of ETFs in recent years. The inflation concerns have seen investors putting more money into commodity ETFs.
With the weakening of currencies like the dollar, ETF investors are also forced to look for opportunities abroad with an interest in fixed-income ETFs and sustainable investing growth.
For instance, mainland China is becoming an attractive destination for global investors. A recent study showed that 86% of investors plan to participate in the region’s equity and bond markets in 2021.
As marketable security, ETFs can easily be traded on exchanges, a key contributor to recent growth. The difference from traditional mutual funds that trade once per day. Notably, ETFs trade freely throughout the trading day.
Based on the recent growth trend in ETFs, the sector will potentially keep soaring in the near term, with more products coming up. At this point, the skepticism regarding ETFs potentially collapsing in the wake of a financial crisis is fading away.
However, with the ever-changing technologies that are reshaping the financial markets, the long-term future of ETFs remains to be tested.