Guess Who’s Driving the ETF Bus?

By any measure, 2017 was a breakout year for exchange traded funds (ETFs). Globally, an unprecedented $630 billion flowed into ETFs, some three-quarters of which came from the U.S. As a result, close to $5 trillion is currently hard at work for ETF investors, helping them participate in the markets conveniently, precisely and generally at low costs.


When you consider that these record flows followed on the heels of a string of record flows—a “mere” $285 billion in 2016—then it’s clear that something meaningful is afoot.

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I’m often asked what’s behind the surging interest in ETFs, and by implication whether it can last. In fact, it can and I believe it will, thanks to three major forces at work:

1. The most consequential is who is stepping hardest on the gas—namely retail, or “wealth,” investors. In the U.S, we estimate that individuals and financial advisors accounted for roughly two-thirds of new cash into ETFs in 2017 (source: BlackRock). One in three American investors now owns an ETF, according to BlackRock’s recently released ETF Pulse survey. What’s more, 88% of them plan to invest more in the coming year.A powerful catalyst here is the industry’s move away from traditional brokerage models, in which commissions are charged per transaction, to fee-based platforms, where clients pay advisors a percentage of the total assets managed. The aligning of advisor-client interests has increased the demand for cost efficiency, transparency and asset allocation—all of which have helped drive ETF usage.

2. It has been a great time to be an investor. The leap in flows last year was strongly influenced by general bullishness on the global economy. For the first time in years, growth is occurring across virtually every region, lifting prospects for earnings. As the appetite for stocks broadens, many investors have turned to ETFs as a simple way to access markets around the world. U.S. investors even overcame their habitual home country bias: in addition to the $180 billion flowing to U.S. stock ETFs in 2017, $118 billion and $42 billion went to developed non-U.S. and emerging stock markets, respectively, according to BlackRock.

3. Finally, the increased adoption of ETFs signals a tipping point, not just in the size of the ETF universe but in how people are using these versatile tools to build portfolios and pursue financial goals. Investors have known for years that ETFs can help them seek out the market return. They are now recognizing that they can also target specific outcomes and asset classes, like factors and fixed income. Our Pulse survey found that in additional to broad index exposures, ETFs are being used to invest in sectors (37%) and single countries (25%), and that nearly two-thirds of investors believe that combining actively managed funds and index ETFs are the best approach to building a portfolio.

Importantly, none of these forces exists in isolation. They are building on each other and rapidly changing how we invest.


About the survey

The 2018 BlackRock ETF Pulse Survey was conducted from 22 August 2017 through 3 September 2017 by Market Strategies International, an independent research company. The survey interviewed over 1,000 individual investors from nationally representative online samples of household financial savings/investment decision makers age 21-75, with $100K+ in investible assets and aware of ETFs.

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