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The longevity of ETFs

22 October 2021 Magwitch Offshore

A recent article on etf.com noted that the SPDR S&P 500 ETF Trust (“SPY”) reached the milestone of $400bn in assets under management. The article had a large focus on how long each $100bn took to get in but one fact about SPY resonates with me: it was the very first ETF listed on a US stock exchange in January 1993 so it’s close to celebrating its 30th “birthday”.

Not only is SPY the very first US ETF but it is also the largest ETF. Being around for a long time has certainly helped it attract the huge amount of funds invested in it.

SPY tracks the S&P500 index, a market capitalisation-weighted index of the 500 largest companies in the US, all of them very investable. To put this into context, the smallest company in the index is News Corporation with a market capitalisation of $14bn constituting just 0.008% of the index. The fact that SPY tracks an index does lend to its longevity. The index is just a statistical measure and thus so long as there are at least 500 companies listed on US stock exchanges the index can continue. And, as long as the index exists, then any ETF tracking that index can also exist. Compare this against the far larger mutual fund industry where basic things like hiring and resignations/retirements of portfolio managers and corporate activity can impact the longevity of mutual funds. How many funds can you think of with a 30-year track record?

S&P Dow Jones Indices release their SPIVA Scorecard twice a year which looks at the active management industry and how they perform against the benchmark. One of the reports included in the scorecard looks at persistency of active managers. It focuses on how many deliver top quartile performance time and time again, while also detailing the changes to these active managers. In the December 2020 Persistency Report, it was found that of the 755 active funds that can be defined as investing only in US Large Cap shares that were around in 2011, 139 of them had been merged or liquidated. This means 18% of active funds within that sector were no more. A further 185 funds had changed their investment style so only 57% of active funds existed and had the same investment mandate just ten years later.

Information on the world’s largest ETFs is readily available on the internet. Using a list of the ten largest ETFs in the world we can begin to understand the ‘how’ and the ‘why’ behind these funds’ longevity. The one thing that is apparent in the list of these ten ETFs is the dominance of iShares (Blackrock) and Vanguard who are the world’s largest issuers. The other thing to note on these large ETFs is just how low the fees are. As ETFs grow in size, they absorb fixed costs better and allow the issuer to drop their fees to remain competitive.

Three of the ETFs track the S&P500 - SPDR S&P 500 ETF Trust (“SPY”), iShares Core S&P 500 ETF (“IVV”) and the Vanguard S&P 500 ETF (“VOO”). As I’ve already detailed, SPY was the first one launched in 1993. IVV followed in 2000 and VOO is the ‘baby’ of the bunch with its launch in 2010. However, it is important to note that Vanguard have been in the index tracking space for a lot longer than that with their Vanguard U.S. Growth Fund Investor Shares (“VWUSX”) dating back to 1959.

The other equity funds within the ten largest funds are:

• Vanguard Total Stock Market ETF (“VTI”) tracking the CRSP U.S. Total Market Index, launched in 2001;
• Invesco QQQ Trust (“QQQ”) tracking the NASDAQ-100 Index, launched in 1999;
• Vanguard FTSE Developed Markets ETF (“VEA”) tracking the FTSE Developed All Cap ex US Index, launched in 2007;
• iShares Core MSCI EAFE ETF (“IEFA”) tracking the MSCI EAFE IMI Index, launched in 2012; and
• Vanguard Value ETF (“VTV”) tracking the CRSP US Large Value Index, launched in 2004.

The remaining two ETFs within the top ten are fixed income ETFs. Both the iShares Core U.S. Aggregate Bond ETF (“AGG”) and the Vanguard Total Bond Market ETF (“BND”) track the Bloomberg U.S. Aggregate Bond Index with BND tracking the float-adjusted version of the Index. The two fixed income funds were launched in 2003 and 2007 respectively.

Summary

A quick look through the ten largest ETFs tells us that besides the oldest approaching the age of 30, three other ETFs have been around for longer than 20 years. A further three have track records of at least 15 years and then the remaining three slightly less than that. IEFA, which launched in 2012, is the youngest but still has 9 years of history.

As alluded to earlier in this article, ETFs can continue to exist so long as indices exist as stock exchange measures. Given that indices can trace their origin back to the first formal stock exchanges it is safe to say that indices and ETFs will be with us for a very long time.

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The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

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Infrastructure cap is way too high
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