ETF Industry Maturity and European Emerging Markets

Although the U.S. ETF industry is considered to be in its infancy by some measurements, its annual growth rates indicate a certain level of maturity. Gone are the days of 70% product growth and 50% asset growth. Despite the strong market of the past five years and record inflows, product quantity growth is averaging less than 10% a year and asset growth is hovering in the 20% range.

The accompanying chart illustrates the annual growth rates for each of the past 10 years. Starting with product quantity, the number of listed ETFs and ETNs exploded from 382 to 1,964 over the past 10 years. However, most of that growth occurred in the first half of that 10-year span, when the product count more than tripled from 382 to 1,369. The most recent five-year period resulted in a cumulative growth of 43%, which works out to an annualized growth rate of just 7.5%.

Asset growth has been a better story, at least during the recent bull market years. Asset growth consists of two components: (1) net inflows and (2) market gains. However, asset growth rates have a third component—the size of the starting base. As the industry continues to grow, it gets harder and harder to sustain large growth rates. Calendar year 2007 had all three components working in its favor to produce an impressive 47% growth rate, which was repeated in 2009. The intervening year of 2008 saw market losses swamp out the inflows, resulting in a 13% drop in assets.

For the year just ended, the U.S. ETF industry reported record inflows of $293 billion. Market gains added another $143 billion for an overall asset gain of $436 billion. Clearly an impressive accomplishment in terms of asset gains, it represented a somewhat less impressive 19.7% asset growth rate. That’s because its base had grown to $2.1 trillion at the end of 2015. With an asset base of more than $2.5 trillion now, future asset growth rates in excess of 20% will be even harder to achieve.

Therefore, predictions of annualized asset growth north of 20% a year on a sustained basis appear to have little merit. Sure, there could be a year in our future when inflows and market gains combine to produce a growth rate north of 20%, but doing so on a sustained basis becomes more difficult as the size of the base increases every year.

Some analysts have been forecasting a massive conversion of open-end mutual funds into ETF structures. That hasn’t happened yet, but if it does, then it could produce a one-off event that appears as a gigantic growth spurt. However, that again will push the asset base even higher, reducing future growth rates even further.

Strength among the various emerging-market ETFs goes beyond the usual suspects to include the European emerging markets of Russia and Poland. Factor ETFs have been very persistent, yet they are sending investors a mixed message. Defensive sectors are among those gaining relative strength this week.

Sectors: Materials grabbed the top spot away from Financials a week ago and has succeeded in fending off a retaliatory strike so far. I added the “so far” qualifier because Financials is directly on the heels of Materials, and one small misstep could rearrange the rankings once again. While the top three sectors held their positions, the eight others all shifted over the past week. Industrials, Consumer Discretionary, Consumer Staples, and Health Care moved higher by one spot, and Utilities jumped three places higher. The theme here is that the defensive sectors are improving in relative strength, although they are still performing below average in absolute strength. Sectors falling in relative strength were Telecom, Real Estate, and Energy. Health Care moved from a negative to a positive momentum score and was replaced by Energy on the bottom.

Factors: High Beta continues to provide leadership and maintains a healthy margin over the other factors. If you are looking for signs of persistence among the investment factors, the top five have now been in an identical lineup for seven consecutive weeks. However, do not assume this persistence will last forever or you could find your portfolio aligned with the worst-performing factors when the market turns. In the lower half, Momentum and Dividend Growth swapped places, while their momentum scores barely budged. Although the factor rankings have been stable, they continue to send investors a mixed message. High Beta, Small Size, Momentum, and Growth are the factors typically associated with aggressive investing. However, while High Beta and Small Cap have been leading the charge, Momentum and Growth have not been able to break into the top-five factors for the past dozen weeks. Instead, nonaggressive factors such as Value and Fundamental have kept them out of the running.

Global: Emerging Markets is moving up strong, and not all of its sources of strength are visible on the Global Edge chart. We track three developing market benchmark ETFs each week. For the diversified category, the current benchmark is the iShares MSCI Emerging Markets ETF (EEM), which encompasses all 25 countries falling within MSCI’s Emerging Markets classification. We also track two subcategories using the benchmark ETFs of SPDR S&P China (GXC) and iShares Latin America 40 (ILF). Latin America heads up the rankings again this week, primarily thanks to the strength of Brazil. China accounts for 25% of the Emerging Markets benchmark, and it climbed four places higher in the rankings this week. However, the developing markets of Europe do not have their own subcategory in the chart, and they have been strong contributors lately. What you do not see in the chart is the strong momentum of Russia and Poland—two countries that helped propel Emerging Markets from fifth to second this week. When the emerging-market categories are gaining relative strength, then the developed markets must be losing relative strength, and that is what we have today: Canada slipped from second to third, the Eurozone fell from third to fifth, EAFE dropped three places, and the U.K. is now a notch lower. Japan sits on the bottom for a second week.

Disclosure: Author has no positions in any of the securities mentioned and no positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) is received from, or on behalf of, any of the companies or ETF sponsors mentioned.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“The chart that we’ve been tracking for years, predicting the ETF industry crossing the mutual fund industry in 2025, is looking right on track. In fact, it’s looking like we might get there sooner, with a little luck.”

—Dave Nadig and Matt Hougan of

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