Why ETFs Are Thriving In 2017

The ETF industry has seen explosive growth in terms of both assets under management and launches thanks to unique strategies, novel concepts, transparency, diversification benefits, enhanced tax competence, less turnover and low cost. In fact, the industry has gathered more than $600 billion in new assets in the first 11 months of 2017. This is up 53.6% from net inflows for the whole of 2016 and almost double the inflows of $326 billion seen during the 11 months of last year (read: First Artificial Intelligence ETF Soars in Popularity).

With this, assets under management in global ETFs rose to a new record $4.7 trillion at the end of November from $3.6 trillion at the end of last year. About 71% ($424 billion) of total inflows came from equity ETFs. Coming to issuers, BlackRock and Vanguard are dominating the industry this year, having gathered $239 billion and $137.1 billion in AUM, respectively.

Inside The Boom

The growth was mainly driven by an astounding rally in the stock market since Trump's victory last year that has raised the appeal for plain vanilla and passive investing. Additionally, low cost has been the biggest crowd puller to the ETF world (read: Best Sector ETFs & Stocks from Trump's First-Year Win).

This is especially true as the top three asset gatherers of 2017 are plain-vanilla ETFs with lower expense ratios, per etf.com. iShares Core S&P 500 ETF IVV accumulated nearly $31.7 billion in its assets base, followed by $20.1 billion for iShares Core MSCI EAFE ETF (IEFA) and $16.3 billion for Vanguard FTSE Developed Markets ETF VEA. These have expense ratios of 0.04%, 0.08% and 0.07%, respectively. IVV has gained 21% while IEFA and VEA have returned little higher at around 25% this year.

Additionally, the rise in "thematic investing" and the craze for "smart beta" are leading to staggering growth. This is because many investors are interested in highly specialized theme or niche investing, focusing on a narrow corner of the market rather than broad sectors. On the other hand, the smart beta strategy helps to capture market inefficiencies in a transparent way by adding extra metrics like dividends, volatility, revenue, earnings, momentum, equal weight and other fundamental factors to the market cap or rules-based indices.

In fact, the top-performing ETFs — ARK Innovation ETF ARKK, WisdomTree China ex-State-Owned Enterprises Fund CXSE, Emerging Markets Internet & eCommerce ETF EMQQ, VanEck Vectors India Small-Cap Index ETF SCIF, and PureFunds Video Game Tech ETF GAMR — belong to these categories. These funds have gained at least 60% in the year-to-date time frame (read: 4 Smart Beta ETFs for Long Term Investors).

Apart from these, an increased number of launches is adding to investor' enthusiasm. After 246 launches in 2016, the industry has seen 256 launches so far this year. Of these, a few ETFs have been able to garner more than $500 million in AUM. iShares Core MSCI International Developed Markets ETF IDEV is the most successful new ETF pulling in $882 million in new assets since its debut on Mar 21. This was followed by inflows of $638.1 for Principal U.S. Mega-Cap Multi-Factor Index ETF USMC and $569.8 million for Principal Active Global Dividend Income ETF GDVD. The former was launched on Oct 11 while the latter debuted on May 9.

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