Mutual fund giant Vanguard popularized low-cost passive investing through index funds. It is now a leader in the rapidly-growing market for exchange-traded funds (ETFs). These are some of the most popular and cost-effective investment options available to investors.
Investors can purchase shares of these securities on stock exchanges just like shares in a corporation. ETFs are baskets of securities that track a corresponding benchmark index and are normally readjusted automatically. One of their best features is that they come with very low fees. The types of ETFs are endless, ranging from bond ETFs and market ETFs to inverse ETFs, foreign market ETFs, and alternative ETFs.
Vanguard's portfolio passed the $1 trillion mark in ETF assets under management (AUM). BlackRock (BLK), which sponsors the iShares family of ETFs, is the only other firm at that elite level. But they aren't the only ones active in the ETF market. Keep reading to learn more about the top five ETF issuers.
Key Takeaways
- ETFs are among the most popular and affordable investment options available to investors.
- BlackRock, Vanguard, and State Street dominate the ETF market with the most offerings.
- The five largest ETF issuers have more than $100 billion each in ETF assets under management.
- The SEC is concerned that these leaders may stifle competition and prevent new entrants in the market.
The Big 5 ETF Issuers
There are five issuers with $100 billion or more in ETF assets under management:
- iShares: $2,273,561.702,907
- Vanguard: $1,965,379.00
- SPDR: $1,018,544.06
- Invesco: $365,620.03
- Charles Schwab: $257,304.07
The Biggest ETFs
All 50 of the biggest ETFs, which range from $23 billion to $329 billion in AUM, are offered by these five top issuers. The five largest funds are:
- SPY - $367.63 billion
- IVV - $303.55 billion
- VOO - $269.38 billion
- VTi - $267.45 billion
- QQQ - $172.86 billion
Among the 50 largest ETFs, BlackRock offers 21, Vanguard sponsors 19, State Street issues six, and Invesco has one.
As passive index-linked ETFs became an increasingly popular alternative to index mutual funds, they represented a logical brand extension for Vanguard, which created the index fund concept.
Factors Spurring ETF Growth
Passive Funds Outperform Active Funds
Persistent underperformance by active managers is spurring the growth of passive index funds and ETFs. A study of 4,600 U.S.-based equity, bond, and real estate funds with a collective $12.8 trillion in AUM revealed that only 24% beat passive alternatives during the 10 years ending Dec. 31, 2018, according to Morningstar.
The same study found that passively-managed large-cap equity mutual funds and ETFs surpassed active funds in AUM as of the same date. In June 2019, only 23% of active funds were reported to beat passive funds.
ETFs Popular With Institutional Investors
While ETFs are mainly viewed as a low-cost vehicle for individual investors, they are also popular with institutional investors. Nearly 25% of institutional money managers' portfolios were in ETFs by late 2018, per research by Greenwich Associates. Professional investment managers are increasingly seeing ETFs as a cost-efficient tool for managing risk and making quick portfolio shifts.
Meanwhile, Vanguard patented a scheme to reduce capital gains taxes on its ETFs, as detailed by Bloomberg. This process offers a competitive advantage, but Vanguard chooses to keep quiet about it, fearing regulatory action to curtail it.
Regulatory Concerns
The dominant combined position of BlackRock, Vanguard, and State Street is raising concerns among regulators, particularly the Securities and Exchange Commission (SEC), that they may be in a position to stifle competition. These three firms control roughly 80% out of about $4 trillion in total ETF assets, a very high concentration ratio that may spark antitrust action.
According to the SEC, consolidation and compression in the industry may be cause for concern for investors. But there is some disagreement in the industry, notably from theInvestment Company Institute (ICI) which stated there is still room for smaller players to forge a place for themselves in the market.
2,288
The total number of ETFs available to investors as of December 2020, according to Morningstar.
The Landscape for New Entrants
According to Morningstar, investors can choose from 2,288 different ETFs. A total of 276 new ETFs launched in 2020, as of Dec. 17 of that year. The report said this was the most active period of any when it comes to new launches since 2015. This is compared to 3,291 ETFs established since 1993. That means approximately 30% of all ETFs since 1993 were shuttered.
Although there may be room for new entrants in the market, they do face challenges. For instance, they may have trouble complying with regulations and marketing their products. Outside help can often cost anywhere between $270,000 to $370,000 annually, plus a percentage of assets.
The Bottom Line
Investing in ETFs is a great way to diversify your portfolio. These investments track a specific sector, index, industry, or asset, and come with low fees. You can purchase shares the same way you would those in a publicly traded company.
Vanguard, which created passive investing through index funds is one of the major players in the ETF industry. Investors can also choose from ETFs offered by BlackRock, which runs the iShares portfolio, Invesco, State Street, Charles Schwab, and other smaller players. But remember, before you invest your money, make sure you consult a qualified financial professional to see if ETFs are right for you.
As an enthusiast with in-depth knowledge of the financial markets and investment vehicles, particularly in the realm of exchange-traded funds (ETFs), let me delve into the concepts discussed in the article you provided.
Vanguard's Pioneering Role:
Vanguard, a mutual fund giant, has been a trailblazer in promoting low-cost passive investing through index funds. Their innovative approach has extended to dominating the rapidly-growing market for exchange-traded funds (ETFs). Vanguard's success is exemplified by the fact that its ETF portfolio has surpassed the $1 trillion mark in assets under management (AUM), a significant milestone.
ETF Basics:
Exchange-traded funds (ETFs) are popular and cost-effective investment options available to investors. These funds operate like shares of a corporation, and investors can buy and sell them on stock exchanges. ETFs are essentially baskets of securities that track a corresponding benchmark index. What sets them apart is their automatic readjustment and, notably, very low fees. The types of ETFs are diverse, ranging from bond ETFs and market ETFs to inverse ETFs, foreign market ETFs, and alternative ETFs.
Key Players in the ETF Market:
The article highlights the top five ETF issuers, each managing over $100 billion in ETF assets. These are:
- iShares: $2,273,561.70
- Vanguard: $1,965,379.00
- SPDR: $1,018,544.06
- Invesco: $365,620.03
- Charles Schwab: $257,304.07
Biggest ETFs and Their Issuers:
The largest ETFs, ranging from $23 billion to $329 billion in AUM, are offered by these top five issuers. The five largest funds include:
- SPY (SPDR S&P 500 ETF): $367.63 billion
- IVV (iShares Core S&P 500 ETF): $303.55 billion
- VOO (Vanguard S&P 500 ETF): $269.38 billion
- VTi (Vanguard Total Stock Market ETF): $267.45 billion
- QQQ (Invesco QQQ Trust): $172.86 billion
Factors Driving ETF Growth:
The growth of ETFs is attributed to various factors, such as the persistent underperformance of active fund managers. A study indicates that only 24% of active managers beat passive alternatives, leading to increased interest in passive index funds and ETFs. Additionally, institutional investors, who make up nearly 25% of ETF investors, see ETFs as cost-efficient tools for risk management and portfolio adjustments.
Regulatory Concerns:
Regulators, particularly the Securities and Exchange Commission (SEC), express concerns about the concentrated power of BlackRock, Vanguard, and State Street, which collectively control around 80% of the $4 trillion total ETF assets. The SEC is wary of potential antitrust issues and the stifling of competition in the market.
Landscape for New Entrants:
Despite the concerns, the ETF market remains dynamic. As of December 2020, investors can choose from 2,288 different ETFs, and 276 new ETFs were launched in 2020 alone. However, new entrants face challenges related to regulatory compliance, marketing, and associated costs.
The Bottom Line:
In conclusion, investing in ETFs is presented as an excellent way to diversify a portfolio, thanks to their ability to track specific sectors or indices at low costs. Vanguard, BlackRock, Invesco, State Street, and Charles Schwab are major players, but the market also accommodates smaller players. The article advises consulting qualified financial professionals before investing to ensure suitability.
This comprehensive overview showcases the intricate dynamics of the ETF market, from major players and regulatory concerns to the continued growth and challenges faced by new entrants.
