Less than two years removed from topping the $1 trillion in assets under management mark for the first time, U.S.-listed exchange-traded products are now home nearly $1.3 trillion in combined AUM. Analysts at Bank of America think that number could almost double to $2.5 trillion in five years.
In a research note published last week, BofA said that in 2012, "overall U.S. ETF assets have increased roughly 24 percent through a combination of price appreciation and flows." The bank expects U.S. ETF assets to jump by $230 billion over the next year and reach $2.5 trillion within the next five years.
The ETF "Big Three" of BlackRock's (NYSE:BLK) iShares unit, State Street's (NYSE:STT) State Street Global Advisors arm and Vanguard have been prolific at garnering new inflows this year with Vanguard leading the charge.
"Year to date we have seen all of the big three grow in terms of assets with Vanguard leading with a 51 percent increase in assets and State Street and BlackRock having asset growth of 23 percent and 18 percent, respectively," according to the note. "As a percent of assets, BlackRock's ytd flows are about 7 percent, State Street is not to far away with 9 percent but Vanguard is much higher with year-to-date flows of 26 percent of assets."
BofA expects Vanguard's low-cost structure to pressure rival ETF sponsors to reduce fees as well. Earlier this month, BlackRock announced it pared fees on some of its ETFs in the fourth quarter. Last week, Charles Schwab (NYSE:SCHW) announced its own expense reduction for some of its ETFs.
Still, it is worth noting that lower fees do not always lead to higher AUM totals, something BofA points out in its research.
"There have been some examples of fee compression among ETFs that track very similar benchmarks. We have found this to be true for some very specific cases, but fees are generally only one of a few factors in the competition for assets. There are some examples of the importance of fees in the competition for assets, but for most ETFs we do not see a clear link between expenses and fund flows due to factors such as fund structure, optimization strategy, securities lending practices, tracking error, creation/redemption mechanism (in-kind or cash), etc.," according to the note.
There are real-world examples of cheap not always being better. A prominent example includes the SPDR S&P 500 (NYSE:SPY), the world's largest ETF by assets. SPY, which has $118.6 billion in AUM, is slightly more expensive than the iShares S&P 500 Index Fund (NYSE:IVV) and the Vanguard S&P 500 ETF (NYSE:VOO), but SPY is far larger than both. In the case of IVV, SPY is more than triple the size of that fund.
The SPDR Gold Shares (NYSE:GLD) charges 0.4 percent per year, 15 basis points more than the iShares Gold Trust (NYSE:IAU). However, GLD is the world's second-largest ETF with almost $74 billion in AUM compared to $11.4 billion in AUM for IAU.
The BofA noted said bond ETFs have grown by 28 percent in AUM terms this year while equity funds have grown by 25 percent. Commodities ETFs have increased AUM totals by 15 percent.
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