Are ETFs a good investment?
Nathan, widely known as ‘Nate,’ is often called the Father of Exchange Traded Funds(ETFs). He was the inventor of the first Exchange Traded Fund, thus leaving an indelible mark on the industry.
Nathan successfully developed an ETF after six years of hard work and toil. He launched the most successful ETF in 1993, i.e., the Standard & Poor’s Depository Receipt, better known as the Spider or SPY.
The number of ETFs has grown significantly since then. As of 2020, more than 700 exchange-traded funds are available globally.
Let’s now look at how the industry has grown over a while.
The total ETF assets grew almost ten times in 2010. ETFs have galloped the psychologically significant $10 trillion Assets Under Management (AUM) mark.
Assets Under Management is the total market value of investments that a person or an entity manages for the investors. To visualize this figure- India is a $3.1 trillion economy.
Thus, the AUM of ETFs worldwide is approximately more than thrice the size of the economy of India! According to BlackRock, Global Business Intelligence, the ETFs are slated to grow to a potential of $14 trillion by 2024.
The biggest ETF companies control most AUM in the ETF world. The biggest companies, according to the size of their AUMs, are as follows:
- iShares: iShares is a subsidiary of BlackRock Inc., the global leader in assets management.
- State Street Global Advisors, the asset management business of State Street Corp., issues State Street SPDR- ETFs.
- Invesco: Invesco Ltd manages it.
- Charles Schwab: The Charles Schwab Corp issues ETFs.
|Parameter||iShares||Vanguard||State Street SPDR||Invesco||Charles Schwab|
|Assets Under Management||$1.8 trillion||$1.3 trillion||$771.7 billion||$260.2 billion||$170.2 billion|
|Number of ETFs Offered||372||80||139||218||25|
|Revenue||$3.5 billion||$45.0 billion||$1.3 billion||$764.4 million||$125.3 million|
According to the 2021 Global ETF Investor Survey of the global ETF market, the United States of America represents over 70% of the Assets Under Management, followed by the European Union and Greater China (The Greater China area includes Taiwan, Hong Kong, Macau, and mainland China).
The Assets Under Management of the Exchange-traded funds in the USA crossed $5 trillion in 2020 compared to a measly $102 billion in 2002.
In India, Exchange Traded Funds have also gained popularity amongst investors. Even though the Indian market is small compared to the heavyweight Americas and Europe, it’s still gaining traction and has a promising future.
ETF assets under management have doubled from 1.54 lakh crore at the start of FY21 to 2.9 lakh crore at the end of FY21, according to SEBI reports. India has a long way to go before it can be considered a mature ETF market.
The majority of ETFs invest in stocks; however, investors have several options, including exposure to debt instruments, commodity derivatives, real estate, currencies, etc.
The ETFs can also have a combination of several asset classes.
According to ETF Database, most ETFs have underlying asset exposure.
Thus, ETFs have a bright future, have grown manifold, and continue to grow. Some factors that will make this instrument a promising proposition are that its investors are pretty active in the market and are very sensitive to cost.
According to the 2021 Global ETF Investor survey, ETF allocations continue to rise and shine despite the ongoing pandemic.
The majority of the respondents in the research had exposure to active ETFs (An actively managed ETF is one that has a benchmark index), also, thematic ETFs are going mainstream.
What is an ETF?
An ETF stands for exchange-traded fund (ETF). One single ETF is a basket of securities that can be bought and sold like mutual funds through a brokerage firm. ETFs track a specific index such as S&P, sector, commodity, or other assets. Much like stocks, ETFs can be traded on the market.
Is an ETF better than a stock?
Investing in an ETF is less risky than investing in a stock, as ETFs are diversified. In the case of ETFs, investors do not control what happens to the portions of the ETFs.
ETFs have a diversified profile of assets, and the risk associated with the investment reduces significantly. In stocks, the risk attached is higher as the stock price depends entirely upon the company’s performance and other exogenous factors of the world.
Are ETFs good for beginners?
ETFs are generally suitable for beginners as they are inexpensive compared to a few other investment tools. ETFs have a diversified asset profile, reducing the risk associated with the investment significantly.