How the ETF Industry Grew In 2020 and What to Expect in 2021

While 2020 brought difficult times for cruise operators, airlines and restaurants, U.S. ETF sponsors shook off an early hiccup and cruised to one of the most successful years in the history of the industry. Starting the year with $4.4 trillion in assets under management (AUM), ETFs rode a wave of in-flows and a powerful stock market rally to finish the year with more than $5.4 trillion of AUM, a 23.4% increase from the end of 2019.

To some degree, these aggregate numbers obscure the challenges facing ETF sponsors. Long gone are the days when an ETF launch attracted attention merely by happening. Promoters launching new ETFs today face a high failure rate and distribution challenges that tilt in favor of large, established ETF sponsors.

The numbers reveal these unpleasant facts. While the industry grew its AUM by more than $1 trillion in 2020, the fastest growing 35 ETFs (measured by dollar AUM growth) accounted for $614 billion, or nearly 60%, of these gains. With a few exceptions, these 35 ETFs are backed by the largest sponsors in the industry and offer plain vanilla strategies that provide broad exposure to equities, bonds and commodities at very low fees. Accounting for about 42% of all ETF AUM at the beginning of the year, the 35 fastest growing ETFs in dollar terms grew their market share to more than 45% by the end of 2020.

Chart: The 35 Fastest Growing ETFs by Dollar AUM Growth

Left to fight over the remaining $400 billion or so of AUM growth in 2020 were 2,100+ other ETFs, the majority of which achieved little success at growing AUM. Indeed, nearly 40% of ETFs that began the year with at least $20 million of AUM saw AUM decline in 2020.

Still, some winners emerged from the scrum for the industry’s remainders and their stories provide insight on current trends at the margins of the ETF world. A useful way of identifying them is to rank ETFs based on percentage growth of AUM (excluding ETFs that began 2020 with less than $20 million of AUM).

The 35 fastest growing ETFs in percentage terms grew from $7 billion to $80 billion of AUM during 2020, a healthy 1,045% increase. But 43% of this AUM growth came from one fund sponsor (Ark Invest). Even among the upstarts, the rewards of ETF sponsorship tend to flow to the few.

Chart: The 35 Fastest Growing ETFs by Percentage of AUM

Perhaps the ETF story of the year was ARK Invest’s suite of five actively managed ETFs, all of which made the list of the 35 fastest growing ETFs in percentage terms. Over the course of 2020, the five ETFs grew AUM from $3 billion to more than $34 billion, benefitting from supercharged NAV growth across the board and massive in-flows from performance-chasing investors.

Ark Invest was one of only two ETF sponsors to have an ETF that qualified as a top 35 fastest growing ETF in both dollar and percentage terms and the only sponsor to have more than one ETF on both lists. Of the top 35 ETFs by dollar AUM growth, 32 were sponsored by one of the industry’s Big Three: Blackrock, State Street and Vanguard. The fourth largest sponsor of ETFs, Invesco, placed one ETF on the list. Ark Invest accounted for the remaining two ETFs, capping one of the greatest years for an active fund manager since Fidelity’s heyday.

In contrast, diversity reigned among the sponsors of the 35 fastest growing ETFs by percentage of AUM. No sponsor placed more than five funds among the top 35 percentage growers and 20 different sponsors were represented on the list. The Big Three managed to place only six funds among the 35 fastest percentage growers. At the margins, at least, the ETF industry continues to offer opportunity for lesser-known sponsors with unique and innovative value propositions.

Chart: ETF Sponsor Scorecard

After years of domination of the U.S. ETF industry by passive index trackers, active managers began to make significant inroads during 2020. While only two actively managed ETFs made the list of top 35 ETFs by dollar AUM growth, the top 35 percentage growers included 14 actively managed ETFs that collectively accounted for 48% of the group’s total AUM growth. Moreover, 13 of these 14 actively managed ETFs were equity funds, in contrast to prior years when the most successful actively managed ETFs focused on fixed income.

Not surprisingly for a year when a robust stock market drove significant AUM gains, equity ETFs occupied most of the spots among both the top 35 ETFs by dollar AUM growth (23 equity ETFs) and the top 35 ETFs by percentage AUM growth (28 equity ETFs).  Interestingly, the top 35 percentage growers included two balanced ETFs (which hold both stocks and bonds), a category of ETFs that has lagged significantly behind the market share of its mutual fund counterpart but has begun to see rapid growth.

From a style perspective, large cap equity ETFs, including international and domestic funds, placed the most entrants (15 ETFs) on the list of top 35 ETFs by dollar AUM growth. Among the top 35 percentage growers, thematic ETFs played the leading role by number of entrants. While no clear definition of what constitutes a thematic ETF exists, at least 18 of the ETFs among the top 35 percentage growers could reasonably be classified as pursuing thematic investing strategies. Aside from ARK Invest’s actively managed ETFs, the fastest growing thematic ETFs included the iShares Global Clean Energy ETF ($4.3 billion AUM growth), the Invesco Solar ETF ($3.2 billion AUM growth) and the U.S. Global Jets ETF ($2.9 billion AUM growth).

Looking forward to 2021, all indications suggest continued growth of ETF industry AUM barring a significant downturn in asset valuations. Large, low-cost ETFs that provide beta exposure to various asset classes have become the primary building blocks for institutional and retail portfolios alike. These funds will continue to attract regular asset flows that account for a large portion of the industry’s AUM growth.

One potential new source of ETF AUM growth revealed itself in November when Dimensional Fund Advisors announced plans to convert six mutual funds with $20 billion of AUM to ETFs in 2021. While a couple of other fund firms had previously announced plans to convert mutual funds to ETFs, none carried the weight of Dimensional. Expect to see more mutual fund sponsors consider conversions to ETFs, particularly with the introduction of non-transparent ETF structures that allow active managers to avoid disclosing holdings daily.

Other potential sources of ETF AUM growth in 2021 include:

• Active Management. While a repeat of Ark Invest’s 2020 performance is unlikely for it or anybody else, the prospects for actively managed equity ETFs appear brighter considering the firm’s success. Outsized performance never goes out of style and a whole new generation of investors is learning how to chase it.
• Thematic Offerings. Thematic offerings as a class endure because nothing in the investing world remains the same. Like the sun rising each morning, every new year brings new fads and trends, each a gleam in the eye of some hungry ETF product developer. The trick lies in separating the fads from the trends.
• Outcome-Oriented Solutions. 2020 saw that rapid growth of a variety of ETFs that seek to provide more tailored solutions to investors. Buffered ETFs, which use options to provide downside protection while limiting upside participation, appear to have found a receptive audience, raising billions of dollars in 2020. Another area ripe for further growth: balanced fund-of-funds that employ the ETF rebalancing process to offer turnkey investment solutions that maximize tax efficiency.

With January 22, 2021 marking the 28^th anniversary since the launch of the first U.S. ETF, one could be forgiven for expecting the industry to settle into a mature phase marked by less innovation and slower growth rates. On the contrary, all signs suggest innovation continues unabated among upstart ETF sponsors while established players continue to grab healthy chunks of market share from a bloated mutual fund industry that saddles investors with higher fees and an inefficient tax structure. For now, at least, the future continues to look bright for ETF AUM growth.

This article is original content written by Matt Patterson for Catalyst Insights.