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Inside the Growing Popularity of ETFs

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The popularity of ETF investing has been going through the roof and it took this approach about 20 years to reach this height. After a smashing 2020, the pace of ETF launches has been robust in 2021. In the first quarter of 2021, we saw about 83 ETF launches following 318 new ETFs in 2020. More than about 60 ETFs have already been launched in the second quarter of this year.

The pace of rollout, in fact, charged up after 2019 which saw about 246 launches compared with approximately 270 each in 2018 and 2017. The demand has been pretty strong. Investors should note that the last few years have been particularly eventful compared to about 240 ETF launches in 2016, 300 rollouts in 2015, 180 ETF initiations in 2014, 150 in 2013 and 170 in 2012.

Meanwhile, the pandemic-ridden 2020 witnessed a record ETF asset growth. A staggering $507.4 billion flowed into U.S.-listed ETFs during the year, surpassing the previous record of $476.1 billion from 2017. Annual inflows for 2020 were also 55% higher than the $326.3 billion recorded in 2019, per etf.com.

As a reflection of this high demand, the $637-billion-Dimensional Fund Advisors converted about $28.8 billion of mutual funds into ETFs. As a result, the fund manager recently just became one of the biggest players in the $6.5 trillion exchange-traded fund arena. At one go, the move placed Dimensional at the conjunction of being one of the 10 biggest U.S. ETF issuers by assets.

One of the key factors for Dimensional is targeting the tax advantages, per co-chief executive officer Gerard O’Reilly, as quoted on Yahoo Finance. If a mutual fund or ETF holds securities that have gained in value, and sells them for any reason, a capital gain will be generated.

“These sales can result either from the fund selling securities for a tactical move, due to a rebalancing effort, or to meet redemptions from shareholders. By law, if funds accrue capital gains, they must pay them out to shareholders at the end of each year,” as quoted on etf.com.

ETFs are better bets here “because they’re index funds, most ETFs have very little turnover, and thus amass far fewer capital gains than an actively managed mutual fund would. But they’re also more tax efficient than index mutual funds, thanks to the magic of how new ETF shares are created and redeemed.,” the etf.com article indicated.

The article went on to elaborate that when a mutual fund investor asks the money back, the mutual fund must sell securities to raise cash in order to redeem. But when an individual investor wants to sell an ETF, he simply sells it to another investor like a stock. No capital gains transaction is here for the ETF.

ETFs That Amassed Most Assets This Year

Against this backdrop, we've highlighted below 10 ETFs that have garnered maximum assets so far this year. The data are as per etf.com.

Vanguard S&P 500 ETF (VOO - Free Report)  – $25.6 billion

Vanguard Total Stock Market ETF (VTI - Free Report) – $20.4 billion

Financial Select Sector SPDR Fund (XLF - Free Report) – $11.8 billion

iShares Core S&P 500 ETF (IVV - Free Report)  – $11.6 billion

Vanguard Total Bond Market ETF (BND - Free Report) – $11.3 billion

Vanguard Value ETF (VTV - Free Report) – $11.2 billion

iShares Core MSCI Emerging Markets ETF (IEMG - Free Report) – $9.07 billion

iShares Core Total USD Bond Market ETF (IUSB - Free Report) – $8.53 billion

Invesco S&P 500 Equal Weight ETF (RSP - Free Report) – $7.60 billion

ARK Innovation ETF (ARKK - Free Report) – $6.56 billion

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