Slicing and dicing

.

  By Guest Blogger Doug Rowat

.

Last post, I wrote about the bond ETF market.

But what of the overall ETF market?

I hunkered down with my Bloomberg this week and offer these observations:

The ETF universe is staggeringly vast. Incredibly, there are more than 13,500 ETFs listed globally. Granted some of these are dual listings, the same ETF in multiple currencies, etc., but it’s still a remarkable number when you consider that it all started 33 years ago with one ETF—the iShares S&P/TSX 60 Index ETF. Even the word ‘explosive’ is an understatement when it comes to describing ETF growth.

Many ETFs won’t make it. There’s no hard-and-fast rule that assures whether a new ETF offering will survive, but generally speaking, a US$50 million market cap is considered a rough threshold for profitability. Below this level, an ETF is at increased risk of being discontinued. Once the ETF universe is screened for market caps above US$50 million, more than 8,000 ETFs disappear from the picture. In other words, potentially hundreds, if not thousands, of ETFs simply won’t make it in the coming years:

The ETF universe diminishes significantly above the US$50 million market-cap threshold

Source: Bloomberg, Turner Investments

The battle for top spot rages. For decades, the SPDR S&P 500 ETF Trust has held the position of world’s largest ETF and currently has a market cap of almost US$370 billion. However, it’s being challenged. Over the past four or five years, the iShares Core S&P 500 ETF (second largest) and the Vanguard Total Stock Market ETF (third largest) have been gaining, particularly Vanguard Total Stock Market. SPDR’s market-cap lead over Vanguard Total Stock Market peaked at almost US$210 billion in 2018, but this lead has since been more than cut in half to only US$98 billion:

Market-cap spread: SPDR S&P500 ETF is facing serious competition from Vanguard Total Stock Market ETF

Source: Bloomberg, Turner Investments

The investment focus of these ETFs is different, of course, Vanguard Total, for instance, is globally positioned with more than 4,000 holdings versus SPDR with its US-focused 500 holdings, but as with most market-share changes in the investment industry, cost explains a lot. Though each of these ETFs are dirt cheap, the iShares Core and Vanguard Total have expense ratios that are a third of SPDR’s (0.03% versus 0.09%). If you’re an institutional investor buying in large scale, lower cost definitely matters.

Crypto ETFs have sucked all-round. Amongst the industry’s most expensive ETFs, crypto ETFs have combined high cost with terrible performance as well as nerve-shredding volatility. As a point of comparison, the average standard deviation (a measure of volatility, the lower the value the better) of the entire ETF universe over the past year is 20.3—crypto ETFs have standard deviations many, many multiples of this. I won’t provide free advertising for these crypto ETFs by identifying them, but here’s the associated data for the most expensive of them over the past year:

Crypto ETFs: high cost, high volatility, terrible performance

Source: Bloomberg, Turner Investments

Tread carefully with actively managed ETFs. The ETF universe is still dominated by passively managed product, but actively managed ETFs have a growing presence as more and more mutual fund companies enter the ETF space. An actively managed ETF may be appropriate for your portfolio, but the broader track record of actively managed ETFs strongly suggests tilting towards passive ETFs. Naturally, actively managed ETFs are more expensive (an average expense ratio of 0.52% versus 0.33% for passive ETFs), but they’ve also underperformed passive ETFs over every significant time period (3 years, 5 years and 10 years).

Beware leveraged ETFs. Of the top-25 worst performing ETFs over the past 10 years, 20 employ leverage. These are ETFs that can be identified through names that include “ultra”, “enhanced”, “daily” or “inverse”. Containing a multiplier (e.g., “3x Bull” or “3x Bear”) is common as well. Leveraged ETFs, generally speaking, shouldn’t be utilized at all by investors, but certainly aren’t designed to be held long term. The average annualized return of these leveraged ETFs over the past decade? Minus 31%.

Finally, here are the global averages. If you’re shopping for ETFs yourself, here are the broader averages of the entire global ETF market (screened for those ETFs that have a market cap of at least US$250 million, equating to a universe of about 2,700 ETFs). Naturally, there’s a vast amount of other criteria that goes into selecting an ETF or building an ETF portfolio (we haven’t touched on asset class, sector or geographic outlook, for instance), but favouring ETFs that score better than many (or all) of these averages is certainly a good starting point.

Global ETF universe: key averages

Source: Bloomberg, Turner Investments. Minimum ETF market cap of $250 million

But gaining access to this ETF data is impossible for the average investor and parsing it time consuming. A better idea? Hire a financial advisor who’s willing to regularly do all the work for you.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.