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U.S. ETFs Hit $4 Trillion in AUM: 4 Reasons Behind the Boom

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The U.S. equity markets are booming and the ETF industry is also seeing explosive growth. The S&P 500 and the Dow Jones crossed the most auspicious threshold of 3,000 and 27,000, respectively, for the first time ever. Moreover, U.S. ETFs hit a new milestone of $4 trillion in AUM per data. With this, the ETF industry took two years to reach $4 trillion from $3 trillion in AUM.

The industry has 2,289 products from 142 providers listed on four exchanges. Notably, U.S. equity ETFs now account for 57% of $4.02 trillion (read: First-Half 2019 ETF Asset Flow Roundup).

We have highlighted some solid reasons for the ETF boom:

Low Cost

Low cost has been the biggest crowd puller in the ETF world as most of the plain-vanilla popular ETFs have expense ratio of under 0.05%. This is because ETFs with low expense ratios significantly outperform their expensive counterparts when other factors remain constant. This can be explained by the following example.

Consider two funds with expense ratios of 0.10% and 0.50% in both of which you have invested $10,000. Now, both funds have delivered the same annual returns of 10% in 10 years. The fund with an expense ratio of 0.10% will grow to $25,703 in 10 years while the same fund with 0.50% in expense ratio will grow by a lower amount of $24,782 in the same time frame. Further, the difference in total returns (after expenses) becomes more significant if we increase the holding period. The same funds with expense ratio of 0.10% and 0.50% when invested for 30 years would have a value of $169,797 and $152,203, respectively, after 30 years.

Vanguard Total Stock Market ETF VTI, Schwab U.S. Broad Market ETF SCHB, Schwab U.S. Large-Cap ETF SCHX, Vanguard S&P 500 ETF VOO and iShares Core S&P Total U.S. Stock Market ETF ITOT are the cheapest funds, charging just 3 bps in annual fees (read: S&P 500 Breaks Past 3,000: How to Trade With ETFs).

Smart Beta

The craze for smart beta is leading to their staggering growth. The smart beta strategy helps to capture market inefficiencies in a transparent way by adding extra metrics like dividends, volatility, revenues, earnings, momentum, equal weight and other fundamental factors to the market cap or rules-based indices. As a result, the smart beta strategy provides investors an opportunity to increase portfolio diversification, reduce risk and enhance returns (alpha generation) over time.

Some of the popular ETFs in this category include Vanguard Value ETF VTV, iShares Russell 1000 Growth ETF IWF, Vanguard Dividend Appreciation ETF VIG, iShares Edge MSCI Min Vol USA ETF USMV and iShares Edge MSCI USA Quality Factor ETF QUAL. Of these, VTV has AUM of $49.7 billion, IWF has $46.3 billion, VIG has $36.8 billion, USMV has $30.1 billion and QUAL has $10.9 billion.

Thematic Investment

A rise in thematic investing is making investors go crazy for ETFs as they are jumping on the potential to put their money into a highly specialized theme (or niche investment). This is because thematic ETFs seek to provide exposure to a trend or developing business model through the compilation of securities from multiple sectors (read: Space ETFs: Explore the Final Frontier).

Some of the most successful ETFs in this category include AdvisorShares Pure Cannabis ETF YOLO, which has attracted $56.7 million in its asset base since its debut in mid April. VanEck Vectors Video Gaming and eSports ETF (ESPO - Free Report) made its debut in October and has gathered $30.4 million in its asset base since then. Procure Space ETF UFO has also been able to garner investor interest, building an asset base of $10 million since its launch in mid April.

New Launches

An increased number of launches is also adding to investors’ enthusiasm. The industry has seen 133 launches so far this year. Of these, a couple of ETFs, namely Xtrackers MSCI USA ESG Leaders Equity ETF USSG and iShares ESG MSCI USA Leaders ETF SUSL, have been able to garner more than billion dollars in AUM. USSG was launched on May 7 while SUSL debuted on May 7. Global X Cloud Computing ETF CLOU has accumulated more than $491 million since its launch in mid April (read: 5 Successful New ETFs of 1H).

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