(BFM Bourse) – ETFs outstanding have continued to grow rapidly since the start of the pandemic. This success is explained in particular by lower costs than on other assets, a very wide choice of products and the possibility of saving with small amounts.
ETFs are among the big winners in financial assets in recent years. And we are now approaching the 10,000 billion dollars in outstanding amounts in the world. According to figures compiled by the ETFGI firm, the assets of listed index funds represented $ 9.920 billion at the end of November. If this amount is down slightly from the record in October ($ 9.980 billion), due in particular to the decline in financial markets last month, the symbolic threshold of 10,000 billion should be quickly exceeded, whether in December or early 2022.
By way of comparison, we can say that this represents the equivalent of 4 times the capitalization of CAC 40 companies. And it is 50% more than all the financial assets held by the French, that is to say – say money on current accounts, shares held, life insurance, Livret A, etc.
Of course, on a global scale, it is still little. According to Allianz, financial assets in the world weighed more than 200,000 billion euros in 2020. The share of ETFs is therefore still modest, around 4% of global financial assets. But it is less and less marginal.
Explosion of outstandings for 15 years
The growth of the ETF market is indeed spectacular. Since January, funds placed in these financial instruments have jumped 24.2%. Over 5 years, this amount has exploded. It has thus increased by 179% compared to the 3.552 billion dollars recorded at the end of 2016 by ETFGI. And 15 years ago, those investments weighed only $ 426 million. Or 23 times less!
For those who are not familiar with ETFs or “exchange traded funds”, these are funds which will replicate the evolution of the prices of a basket of stocks, bonds, commodities. This is why they are also called trackers. Concretely, let’s take an ETF on the CAC 40. If the value of the CAC goes up by 1%, your share in the ETF goes up by 1%, if the CAC goes down by 1%, the price of your share goes down by 1%.
How to explain such success? First, by simplicity. We quickly understand how it works and we can, as they are quoted continuously, buy and resell his shares. Second, even with a small budget, say 100 euros, you will find ETFs to buy. And besides, many applications – the famous robot advisors – have been launched around this, to help people save by accumulating small amounts. And often there are ETFs behind it. So it allows everyone to invest, especially young people who are just starting out and do not have large means.
Third, there is a very wide choice of ETFs. This makes it possible to replicate a particular index or to choose themes to surf on major trends. For example an ETF on new technologies or a low carbon ETF. This again corresponds quite well to the aspirations of the new generations of stock marketers.
Particularly low costs
Finally, the management costs are particularly low. We are generally at 0.3% per year. It can be a little more, but sometimes it is even less. In any case, as always, you have to find out and take a good look at the costs before buying.
It should also be remembered that there can be risks. For example that your ETF is not liquid, that is to say that you have difficulty buying or reselling your shares. This is why it seems safer to bet on ETFs with large assets, with more investors involved. Then people tend to forget that if you take an ETF linked to a theme, you have to bear the risk that relates to that theme. Imagine an ETF on companies related to electric cars. If suddenly the market collapses because we switch to all hydrogen, your savings will melt quickly. It is therefore riskier than betting on an ETF that replicates a large number of various companies, such as an S&P 500 tracker.
Moreover, according to a recent note from Banque Richelieu, nearly 50% of thematic ETFs launched over the past ten years have disappeared. In fact it is quite easy to understand. If the amount invested drops too drastically, with the low fees applied, ETF managers can no longer live and must therefore cut everything. This is why you have to diversify your savings, including with ETFs, for example by mixing thematic ETFs and ETFs on broad indices (Nasdaq, Euro Stoxx 50, etc.).
Jean-Louis Dell’Oro – © 2021 BFM Bourse