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We Analyzed Over 2,000 ETFs Sold In The US—Here Are The Top 10 Things We Learned
We analyzed 2,049 ETFs trading on the US stock exchanges, so we’d like to share the most important insights about the ETF market with you. We hope this will be educational, and that you’ll keep this at the back of your mind as you pursue your investment choices.
ETFs are a $3 Trillion market in the US only. If you do the math, you’ll quickly figure out the average ETF attacks just under $1.5 Billion in assets under management. However, ETFs are fairly concentrated. The number of ETFs above $1.5 Billion in assets is only 255, and they represent almost 90% of all ETF assets by value.
Here are the things that immediately jumped out of us when we looked at the ETF landscape:
1. ETF investors love equity… perhaps because of relatively large returns on equity ETFs?
When we looked at all ETF assets, one category jumped out—equity. Almost 80% of all ETF assets are in equity-based ETFs. The next category is fixed income. Those two combined comprise 97% of all ETF assets.
A fun fact is that many of the most frequently searched or mentioned ETFs fall in the commodities and alternatives class (judging by Stocktwits mentions or Google traffic). Take for example UGAZ, DGAZ, XIV, JNUG and NUGT—none of these ETFs are on the top list measured by assets.
One explanation why US ETF investors are so focused on equity is the return. The average equity ETF returned 7.71% over the last 5 years vs. 1.42% for fixed income.
Commodities and alternatives are deep in the red. The average commodity ETF returned an annualized -9.98% over the last 5 years, and the average alternatives ETF returned -9.10%. See the chart below.
So, ETF investors are smart—money flocks to those assets that generate great returns, which brings us to our second learning from this study:
2. The majority of assets are invested in high-performance, low-cost ETFs.
We looked at which ETFs attract the most money. The one thing became obviously clear—top ETFs by assets have the lowest fees and the highest performance.
The five-year return of top 37 ETFs comprising almost one-half of all ETF assets is astoundingly 6.37 percentage points above the average ETF’s five-year return.
On the flipside, the bottom 10% of all ETFs have a five-year return of -6.42%, 10.42 percentage points below the average ETF.
The bottom ETFs (by assets) tend to have an over-representation of commodity and inverse ETFs (we’ll discuss those later).
Looking at the ETF landscape from the geo perspective, it’s apparent that the bulk of the focus is on the US. Here’s what we observed:
3. Relative to the size of world economies, American investors are disproportionately invested in ETFs focused on the US.
Although the US represents roughly a quarter of the world economy by GDP, US-focused ETFs represent 73% of all ETF assets.
The contrarians may argue that the US-focused ETFs already have tremendous exposure to international markets. True.
But even if you assume that half of the US-focused ETFs’ performance can be attributed to non-US markets (which may be the case for multinational corporations), the US is still overly represented in the ETF landscape relative to the size of the world economies.
Here is how the ETF asset distribution by geo focus looks like relative to world GDP for the US, developed and emerging countries:
You may notice that emerging ETFs represent 7% of the all ETF assets, while emerging economies are 35% of the world’s GDP.
Other non-developed, non-emerging economies (e.g., frontier markets such as Argentina and Vietnam) are barely represented in the ETF landscape.
Our thesis is, the biggest opportunity for ETF investors to increase global exposure is through emerging and frontier market ETFs.
Next, we looked at the ETF landscape by issuer. Here is what we found out:
4. Top 5 ETF issuers control almost 90% of the ETF market.
Those five issuers are Blackrock iShares, Vanguard, State Street Global Advisors, Invesco PowerShares and Schwab.
With a 40% market share, Blackrock is the market leader and has the most complete set of offerings: 342 ETFs—2.2 times the next provider, Invesco PowerShares.
Vanguard and Schwab are the cost leaders.Their average expense ratios across of all of their ETFs are 0.11% and 0.13%, respectively.
Most ETFs are designed to track a market index. This applies to the majority of ETFs BlackRock, Vanguard, State Street, and Schwab offer.
Some other ETFs are designed with a goal to outperform market indexes—this is the case with leveraged and inverse ETFs.
A leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. An inverse ETF is constructed to profit from a decline in the value of an underlying benchmark. Here us what we learned by analyzing the returns of leveraged ETFs:
5. Leveraged ETFs have on average performed better than unleveraged ETFs.
Contrary to the popular belief, not all leveraged ETFs are ‘widowmakers.’
When the market trends up, leveraged ETFs amplify the positive market direction, resulting in superior returns. Conversely, when the market trends down, leveraged ETFs perform worse than the market in general.
Some of the leveraged ETFs that have produced superior returns over the last five years include:
- Leveraged sector ETFs (e.g., technology, finance, healthcare and semiconductors). Examples include: SOXL, FINU, CURE, FAS, and TECL.
- 2x/3x index ETFs (e.g., S&P 500, mid-cap US, NASDAQ). Examples include: TQQQ, UPRO, SPXL, TNA, and BIB.
Most of the leveraged ETFs also have an extremely high beta (i.e., they are risky), and their risk-adjusted performance (measured by the Sharpe ratio) is often below the indexes’ performance.
Now, let’s look at inverse ETFs. Here’s our big takeaway:
6. Inverse ETFs have on average performed worse than positively correlated ETFs.
The illustration below tells you the story—inverse ETFs have produced negative returns on average. When the market trends up, inverse ETFs generate pronounced negative returns.
You may argue that this view may change when the markets change the direction.
Inverse ETFs that produced outstanding returns over the last five years include inverse VIX short-/medium-term (XIV, ZIV and SVXY), short crude oil (DTO, SZO, and SCO), short commodities and short agriculture ETFs (DEE and AGA).
Now, you may wonder, what do you get when you mix inverse and leveraged ETFs in a portfolio?
The answer is, a lethal injection—which brings us to our next learning:
7. ETF/ETN issuers with a high concentration of inverse and leveraged funds tend to underperform the market on average.
|% of Inverse ETFs||% of Leveraged ETFs|
Here is how the returns look like for those three issuers:
The reason why the average returns are sub-par is because of the leveraged or inverse themes that have produced very negative returns.Those themes include:
- 2x daily VIX short-term futures
- 3x natural gas
- 3x semiconductor bear
- 3x daily gold-miners index
- 3x China bear
- 3x inverse NASDAQ index
- 3x financial sector bear
Now, let’s look at the bright side—we’re going to present you the strategies that have worked well (returns wise) for ETF investors. This is just an abstract of historical performance, not a recommendation for where to put your money.
We looked at two strategy types:
- Strategies that have attracted significant assets (over $100B) across all ETFs belonging to those strategies. We call them ‘big-city’ strategies;
- Strategies that have attracted moderate assets (below $20B) across all ETFs mapped to those strategies. We call them ‘small-town’ strategies.
8. Among the ‘big-city’ strategies (which ETFs have collective assets of over $100 Billion), growth, value and dividends stand out because of their superior historical returns.
The growth ETFs that have attracted the most ETF assets are:
- iShares Russell 1000 Growth ETF (IWF); $36B assets
- Vanguard Growth ETF (VUG); $28B assets
- iShares S&P 500 Growth ETF (IVW); $19B assets
The value ETFs that have attracted the most ETF assets are:
- iShares Russell 1000 Value ETF (IWD); $37B assets
- Vanguard Value ETF (VTV); $32B assets
- iShares S&P 500 Value ETF (IVE); $13B assets
The dividends ETFs that have attracted the most ETF assets are:
- Vanguard Dividend Appreciation ETF (VIG); $25B assets
- Vanguard High Dividend Yield ETF (VYM); $19B assets
- iShares Select Dividend ETF (DVY); $17B assets
Now let’s look at the ‘small-town’ strategy winners.
9. Among the ‘small-town’ strategies (which ETFs have collective assets under $20 Billion), currency hedged fundamentals, ESG and momentum stand out because of their superior historical returns.
Currency hedging is a strategy designed to mitigate the impact of currency or foreign exchange risk on international investments returns. FundamentalETFs weigh stocks based on the fundamental criteria: book value, cash flow, sales and dividends.
ESG strategy incorporates sustainable and responsible investing—Environmental, Social and corporate Governance (ESG) criteria—into investment analysis and portfolio construction for ETFs.
Momentum is an investment strategy which objective is to capitalize on the continuance of existing trends in the market.
The currency hedged fundamentals ETFs that have attracted the most ETF assets are:
- WisdomTree Europe Hedged Equity Fund (HEDJ); $9B assets
- WisdomTree Japan Hedged Equity Fund (DXJ); $8B assets
- WisdomTree Germany Hedged Equity Fund (DXGE); $0.1B assets
The ESG ETFs that have attracted the most ETF assets are:
- iShares MSCI KLD 400 Social ETF (DSI); $0.9B assets
- iShares MSCI USA ESG Select ETF (SUSA); $0.6B assets
- iShares MSCI ACWI Low Carbon Target ETF (CRBN); $0.4B assets
The momentum ETFs that have attracted the most ETF assets are:
- iShares Edge MSCI USA Momentum Factor ETF (MTUM); $3.3B assets
- PowerShares DWA Momentum Portfolio (PDP); $1.4B assets
- First Trust Dorsey Wright Dynamic Focus 5 ETF (FVC); $0.3B assets
Now that we’ve looked into individual strategies and factors, let’s look at questions surrounding the returns on broad-brush ETFs: large- vs. mid- vs. small-cap ETFs.
10. Among all large-, mid- and small-cap ETFs above $10 Billion in assets, small- and mid-cap funds have performed slightly better than large-cap ETFs.
For longer time-frames, mid-cap is the winner. But in the past year, small-cap has done the best. See below.
Here are the top large-cap ETFs by assets under management:
- SPDR S&P 500 ETF (SPY); $235B assets
- iShares Core S&P 500 ETF (IVV); $121B assets
- Vanguard S&P 500 ETF (VOO); $71B assets
Here is the look at the top mid-cap ETFs by assets under management:
- iShares Core S&P Mid-Cap ETF (IJH); $40B assets
- Vanguard Mid-Cap ETF (VO); $20B assets
- SPDR S&P Midcap 400 ETF (MDY); $19B assets
Below are the top small-cap ETFs by assets under management:
- iShares Russell 2000 ETF (IWM); $36B assets
- iShares Core S&P Small Cap ETF (IJR); $31B assets
- Vanguard Small-Cap ETF (VB); $19B assets
In our following posts, we’ll be double-clicking on individual segments of the ETF market.
What questions would you like us to answer for you? Send us your questions and thoughts to: hi [at] finstead [dot] com.