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$50,000,000,000,000 by 2030: Morning Brief

Myles Udland
Markets Reporter

Friday, December 13, 2019

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The ETF takeover is only just starting

If you think the ETF market is big now, just give it a decade.

In a report published Thursday, analysts at Bank of America Global Research led by Mary Ann Bartels estimate that by the end of next year assets in ETFs will top $5 trillion. ETF asset growth has averaged 25% per year for the last decade. This growth rate has been "fairly consistent," according to BofA, and indicates an investing trend that isn't likely to slow down anytime soon.

By the end of next decade, this leaves the firm estimating that assets held in exchange-traded funds will total $50 trillion. That is 50 followed by 12 zeroes.

"A number of factors are likely to drive robust growth in ETF assets in 2020," the firm writes, "including continued momentum for the ongoing shift from passive to active, increased awareness of the ETF structure as offering attractive tax efficiency, low cost, liquidity and transparency characteristics."

The firm also notes that its "relatively constructive" market views should support ETF asset growth next year.

But the ETF revolution isn't really about the market view so much as it is investors taking advantage of the only free lunch available in the market: lower fees.

BofA notes that in 2009, 31% of ETF assets were held in the cheapest funds. By 2019, the ratio had jumped to 52%. And this coming during a decade when assets in ETFs went from around $770 billion to $4.3 trillion.

The total amount of ETF assets in funds with the lowest expense ratio is now roughly three times what the entire universe of ETFs held a decade ago.

The lower the cost of an ETF, the more assets that fund is collecting. (Source: Bank of America Global Research)

ETFs are also often conflated with the rise in passive investing. But not all passive investments are ETFs and not all ETFs are passive investments. The original Vanguard S&P 500 tracking index fund is a mutual fund, for instance.

Back in 2016 — in the days before Trump tweets and trade rumors became the only thing that market watchers cared about — "market socialism" had a few months as the hottest topic of conversation. Strategists argued that the rise of passive investing would render previously efficient capital allocation decisions all but centrally-planned. As we've written in previous lives, however, it only takes but one active participant in a market to render that market definitionally efficient.

So while the rise in ETFs certainly tracks with the rise of passive investing in which investors simply try to match the performance of an index at a low cost, ETFs also offer investors ways to invest in factor or quant strategies that have risen in popularity over the last few decades.

Buffett-style fundamental analysis of individual securities is out, Bridgewater-style quantitative investing is in. And ETFs make this possible.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

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