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Convergex CEO finds ETF investors too concentrated

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Convergex CEO, Eric Noll writes that US listed ETFs are coming off a banner year in 2016 with USD298 billion of inflows – a new annual record for this still-growing investment vehicle.

“There are now almost 2,000 funds in the domestic ETF ecosystem and over USD2.6 trillion in assets under management (AUM). We expect 2017 to be equally successful for the industry.”
 
However, Noll writes that even with this growth, both in product choice and overall assets, the ETF industry faces a clear problem: investors cluster too much in the largest funds.
He lists a few key points drawn from data courtesy of www.xtf.com, a part of the London Stock Exchange Group):
 
•        The top 10 domestic ETFs by AUM have a collective USD720 billion in assets, or over 25 per cent of total ETF AUM.  In other words, 0.5 per cent of US listed ETFs have +25 per cent of total industry AUM.
 
•        During 2016, those top 10 ETFs pulled in USD99.8 billion of fresh assets, or 32 per cent of all ETF inflows (USD308 billion over the last year).
 
•        Scratch the surface just a little harder by looking at the top 20 domestic ETFs by AUM, and you’ll see they hold 40 per cent of all fund assets and saw 45 per cent of all incremental fund flows over the past year. Essentially, 1 per cent (20 out of 1,976 funds) of US listed ETFs have almost half of all the industry’s AUM.
 
Noll writes that such concentration was to be expected earlier in the industry’s growth phase, with fewer options and a retail investor focus. “Now, however, the product spectrum is much wider and institutional investors increasingly use ETFs to manage assets in a cost efficient and targeted manner. And yet AUM growth still concentrates in those ETFs that sit at the top of the league tables.
 
“From our position as a leading agency-focused broker serving institutional clients, we hear a lot of concerns about the trading liquidity of ETFs outside those top 20 names. Our own analysis shows that fully 50 per cent of all trading volume in US listed ETFs is concentrated in those top 20 names. Move down the list of commonly traded ETFs to include the top 50 names (just 2.5 per cent of all US listed ETFs), and those constitute 70 per cent of all ETF trading in US markets.
 
“Perversely, this concentration comes at a time when the US listed ETF ecosystem has never been more vibrant, offering investors ever more opportunities to target specific and useful slices of capital markets exposure. In addition, the drop in sector and asset class correlations since the US Presidential election amplifies the potential investment payoff for such decisions. We expect these lower correlations to continue through 2017 as capital markets feel their way through the first year of a Trump administration, the Federal Reserve’s rate cycle, and the upcoming elections in France and Germany, just to name a few major market catalysts this year.
 
“In short, there has never been a better time to be an active investor using ETFs. There are more investment choices than ever and better opportunities for outperformance than at any point since the Financial Crisis.  The upcoming year should be an outstanding one for money managers as they seek to generate returns on behalf of their clients.”
 

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