We know that assets in exchange-traded funds (ETFs) have overtaken hedge funds—but an article by Eric Balchunas for Bloomberg last week pointed out that the amount of money flowing through ETFs has topped the U.S gross domestic product. Consider that in the last 12 months, US$18.2 trillion in ETF shares were traded—the U.S. GDP stands at US$17.4 trillion.
It’s a stunning figure when think about it especially when you think about the fact that, when it comes to assets, U.S. ETFs only have US$2.1 trillion. So the turnover in these products is huge—as Balchunas points out, it’s roughly 870% a year.
A pattern emerges when comparing actual assets to assets traded—investors are taking full advantage of low costs and liquidity to shift around their portfolios and gain quick exposure to a growing array of asset classes. And with interest rates set to rise and global economic uncertainty still jolting investor confidence, the pattern will likely continue as investors rebalance again and again.
Balchunas also points out that the leader in all the trading is the “insanely active” SPDR S&P 500 ETF (SPY) which makes up a third of total trading—US$6 trillion or US$24 billion a day and four times more trading activity that any other security on the planet. And yet it only has US$177 billion in assets—which means the yearly turnover for the SPY is a crazy 3,400%.
It’s not equity-based ETFs showing these multiples—bond ETFs are also experiencing huge trading volumes. The iShares 20+ Year Treasury Bond ETF (TLT) trades $1.1 billion a day (more than what Citigroup stock trades, Balchunas also notes).
So what does all this trading do for markets? Besides generating additional profits on Wall Street, Balchunas wonders whether retail investors can resist the temptation to trade and sit tight in their positions, benefiting from tighter bid/ask spreads. However should investors jump into the fray and engage in heavy trading, they might end up poorer for it.
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