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Is the ETF Industry Outpacing Hedge Funds?


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According to leading independent research and consultancy firm in the ETF space, ETFGI, the ETF industry grew at a faster pace than the entire global hedge fund industry in 2016. The amount of money invested in exchange traded funds was a massive $530 billion.

As per ETFGI's analysis, a record $3.548 trillion was invested in the 6,630 ETFs listed globally. This was compared to $3.018 trillion invested in  8,326  hedge funds at the end of 2016, according to a new report published by Hedge Fund Research (HFR). 

It has been noted that many investors have developed a dislike toward some of the characteristics of hedge funds like higher fees and lack of liquidity. Performance is also a concern. In 2016, HFRI Fund Weighted Composite Index returned 5.5%, compared with 11.9% return of the S&P 500 index. In the past six years, the S&P 500 index has consistently beaten the HFRI Fund Weighted Composite Index.

The firm stated that during 2016, ETFs listed globally gathered a record $389.34 billion in net inflows compared to HFR's $70.1 billion in redemption by hedge fund investors, the highest since 2009, when $131 billion was redeemed (read:  Best & Worst ETFs of February 2017 ). 

In the current scenario, the following popular ETFs tracking the major indices can be considered:

SPDR S&P 500 ETF Trust SPY

The world's largest ETF saw inflows of more than $22 billion in new assets, with AUM amounting to $240 billion. This ETF tracks the S&P 500 index. Looking at the volume of the fund at more than 65 million shares a day, it is clear that the fund is a popular investment tool for active traders.

This ETF is one of the most liquid funds in the space and charges a paltry 9 bps in fees a year. The fund has an 18.2% allocation to its top 10 holdings. SPY returned 6.0% in the year-to-date time frame and 19.5% in the past one year. SPY currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

SPDR Dow Jones Industrial Average ETF DIA

This ETF tracks the Dow Jones Industrial Average and saw inflows of more than $216 million in assets, with AUM of $16.4 billion. Owing to the Trump rally, the Dow crossed the 21,000 mark and a lot of money flowed into DIA. This ETF is one of the most liquid ETFs since the index that it tracks comprises the most famous and profitable companies in the country, which less likely to fail. However, most of the businesses are likely in their mature stage and therefore less likely to grow beyond a certain limit (read:  Dow Jones Hits 12th Session of Record High: ETFs in Focus ). 

This fund charges just 17 bps a year and has a volume of 2.74 million shares a day. However, it bears concentration risk because it has a 52.25% allocation to its top 10 holdings. DIA returned 6.0% in the year-to-date time frame and 23.9% in the past one year. DIA currently has a Zacks Rank #3 with a Medium risk outlook.

Bottom Line

Owing to the recent disappointing performance of the hedge fund universe and lack of transparency, ETFs that are a more liquid and transparent investment tool have gained popularity. With greater investment inflows, ETFs seem to be replacing hedge fund positions in investors' portfolio. 

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SPDR-SP 500 TR (SPY): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , ETFs
Referenced Symbols: DIA , SPY



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