The runaway growth of exchange-traded funds over the past decade shows no signs of abating, with a top industry forecaster now projecting the assets will surge at least 18% this year, topping $4 trillion for the first time.
Deborah Fuhr, managing partner at the London-based consultancy ETFGI, said new regulations expected this year from the Securities and Exchange Commission will make it easier for big purveyors like BlackRock Inc. (BLK - Get Report) , State Street Corp. (STT - Get Report) and competitors in the money-management industry to issue new ETFs.
Both big institutional and individual investors continue to shift money into ETFs, which are often linked to indexes like the Standard & Poor's 500 and can be bought over exchanges as easily as stocks, with fees that are usually lower than those on traditional mutual funds managed by human stock pickers. Last year, Vanguard Group, the privately held money-management giant, announced commission-free online trading in almost 1,800 of competitors' ETFs in addition to 77 of its own.
"The pool of users is growing, and the allocation of ETFs is growing," Fuhr said in a telephone interview. ETFs in the U.S. ended 2018 with $3.39 trillion of assets under management, roughly on par with a year earlier, as new investments in the vehicles offset the negative impact of market movements.
Further industry growth could provide a boon to BlackRock, which reaped $167.5 billion of new investments for its iShares ETFs last year, even as institutional investors pulled a net $11.2 billion from the firm's active stock- and bond-picking funds. The most popular ETFs include State Street's SPDR S&P 500 ETF (SPY - Get Report) and BlackRock's iShares MSCI Emerging Markets ETF (EEM - Get Report) .
The enduring popularity of ETFs also is likely to attract new competitors in the money-management industry. From 1999 through 2017, assets in ETFs multiplied 100-fold to more than $3.4 trillion, while mutual funds tripled to about $19 trillion, according to the Investment Company Institute.
Broad stock-market pressure has pushed BlackRock's share price downby 19% over the past year, but that's less than half the decline witnessed at rival fund companies Invesco Ltd. (IVZ - Get Report) and Affiliated Managers Group Inc. (AMG - Get Report) .
Like many firms, Invesco is trying to catch up with the trend, spending $1.2 billion last year to acquire Guggenheim Investments' ETF business.
Indeed, the growth in ETFs has been so stark that some investors have warned the industry could face severe risks in a market downturn, or that they might exacerbate a steep selloff.
Fuhr said that assets invested in ETFs have been doubling roughly every five years, a trend that is likely to continue especially since mutual funds still occupy a predominant market share.
More automated websites are using ETFs as a staple in portfolios, Fuhr said. And investors are increasingly using them to invest in commodities, she said, at least partly owing to the complexity of opening and managing an account on a futures exchange. ETFs that specialize in producing income -- as opposed to market gains -- are likely to see extra interest this year, along with those that focus on bonds and potentially even stocks traded on China's mainland exchange.
"These are core building blocks," Fuhr said. "The landscape is changing and it will continue to change, and the growth can continue."