ETFs Dominate First Half Leaving Active With Work To Do

As has been widely reported, exchange-traded funds are on breakneck asset-gathering pace to start 2017. With the first half of the year in the books, data indicate ETFs added almost $250 billion in new assets in the January through June period.

To put that total in perspective, 2016 was a record year of asset gathering for ETFs with the annual total checking in at $287.5 billion. It appears that total will be easily surpassed this year with that moment possibly arriving in the current quarter.

ETFs, due in part to favorable fees, are adding assets at the expense of their higher-priced, actively managed mutual fund rivals. The SPDR S&P 500 ETF SPY, the largest ETF in the world is up 9.2 percent year to date while the average large-cap core mutual fund in the Lipper peer group is higher by 8.7 percent, according to CFRA Research.

Yes, Fees Matter

Looking at the top asset gatherers among ETFs, one of the obvious themes is that investors are favoring low-fee funds. The iShares MSCI EAFE ETF EFA, the largest ETF tracking ex-US developed market stocks, is one of the most expensive ETFs among this year's top 10 asset gatherers, but with an annual fee of 0.33 percent, EFA is far from expensive.

“Part of the problem, as it will be for many other styles we discuss, is the 1.1 percent average expense ratio for mutual funds in contrast to the 0.09 percent for this index alternative,” said CFRA Director ETF & Mutual Fund Research Todd Rosenbluth in a note.

The iShares Core S&P 500 ETF IVV is this year's top asset-gathering ETF with $17 billion in year-to-date inflows. IVV charges a scant 0.04 percent, making it hard on actively managed funds to compete on price.

International Is Cheap, Too

In search of value, investors have been flocking to ex-US developed markets and emerging markets ETFs this year. Not surprisingly, low-fee products, such as the iShares Core MSCI Emerging Markets ETF IEMG are succeeding here as well.

“As hot as developed international markets were year to date through June, emerging markets were even hotter,” said Rosenbluth. Despite the rhetoric from (President) Trump during the election campaign and to start his term against China, Mexico and many other such markets, the average emerging markets mutual fund was up 18.1% in the first half of 2017. Yet, IEMG climbed an even higher 18.7%, aided by its net expense ratio of 0.14 percent that was well below the 1.5 percent mutual fund average.”

Only IVV has added more new assets than the $10.9 billion added by IEMG this year.