Ian Salisbury in the Wall Street Journal reports on the changing nature of ETF ownership. The rapid growth in ETFs has also generated a degree of controversy. What is not controversial is the expectation that ETFs will continue to attract a growing share of investor assets.
Though data about who owns ETFs are hard to come by, and all numbers are basically estimates, the handful of major fund companies that dominate the market say the balance of fund assets has shifted steadily from institutional to retail, though both are growing.
Barclays Global Investors, whose funds hold more than half of all U.S. ETF assets, estimates about 60% of money in its family of exchange-traded funds is retail, up from about half two or three years ago.
One story behind the great success of ETFs has been the unique synergy between the institutional and retail sides. The growth of ETFs has been driven by the different needs of these two sets of investors.
Though ETF assets are becoming predominantly retail, that is not true for day-to-day trading. In fact, about 80% of ETF trading volume remains institutional, according to State Street.
“Hedge funds are the No. 1 users of ETFs” in terms of trading, says Dodd Kittsley, head of research at State Street. “Retail investors are buy and hold.”
So the bulk of the assets are coming from longer-term retail investors, but the healthy interest of active institutional traders make these ETFs more liquid, i.e. easy to trade, than they would be normally. The question for those ETFs that are overwhelmingly retail-focused is whether they can attract enough trading interest to make their funds easy to trade.
Katie Benner at TheStreet.com (who has a fan in Random Roger) looks at whether ETFs would better withstand a downturn in the economy. We would agree with Roger that ETFs will in large part reflect the underlying performance of their respective sectors/asset classes. However ETFs could thrive in such a scenario to the degree to which they provide truly novel return streams.
In that sort of scenario inverse and leveraged inverse ETFs will clearly thrive. As will those funds that offer true diversification, like metals, commodities, or uncorrelated international sectors. While every economic (and market) plays out differently, what does not change is investor desire to try and find a safe harbor. The degree to which ETFs provide this, then they have a chance to be relative winners in a slowdown.
As an aside, for those of you looking for some data on the overbought/oversold nature of some popular ETFs then head on over to Ticker Sense.