4 Biggest ETF Stories Of 2017

The year isn't over yet, but it's obvious what the biggest stories of 2017 are.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

What's the biggest ETF story of 2017? That's a tough one, because there have been so many good stories this year. If you ask five different people, you might get five different answers.

The story of the VanEck Junior Gold Miners ETF (GDXJ), where the $4.2 billion fund changed dramatically after becoming too big for its index, was certainly interesting. Then there was the drama-filled story of the ousting of PureFunds from being associated in any way with the $1 billion cybersecurity ETF that once bore its name (now the ETFMG Prime Cyber Security ETF (HACK)).

Both those stories were intriguing, but not necessarily that impactful for most investors. Granted, it's a subjective exercise to pick out “the biggest” stories, but from where I stand, there were a handful of stories that stood out above the rest.

I'm sure my colleagues will chime in during the next several weeks with their own opinions, but here are my four biggest ETF stories of 2017, in no particular order.

The Bitcoin ETF Saga

Bitcoin has, hands down, been one of the most exciting financial market stories of 2017. No matter your views on the digital currency, it's been impossible to ignore the meteoric rise of this intangible-yet-valuable asset.

From $950 at the start of the year, bitcoin rocketed to more than $8,000 this week, and is showing no signs of slowing down. Its ascent has gotten people around the world buzzing and asking questions: Is bitcoin the new gold? Is it a bubble? Are cryptocurrencies a legitimate asset class?

 

Bitcoin Price

 

 

Those questions will likely be answered in the months and years to come. Another question that will likely be answered is whether the first bitcoin ETF will come to market anytime soon.

For all the excitement about bitcoin this year, ETFs have been left out of the party, though not for want of trying. The Securities and Exchange Commission shot down a few potential bitcoin ETFs earlier this year, which at first seemed like the nail in the coffin for such a fund.

Then after Cboe Global Markets, parent company of ETF.com, announced it would launch bitcoin futures as early as this year, those hopes were reignited. If bitcoin futures launch as expected, the first bitcoin ETF could follow shortly thereafter.

For better or for worse, ETF investors could soon be joining the bitcoin party.

Record-Low Volatility

Heading into 2017, many investors were bracing for a rocky market environment, and who could blame them? The previous year was a tumultuous one; the Federal Reserve was gearing up for an accelerated pace of rate hikes; and the U.S. had just witnessed one of the biggest upsets ever in a presidential election.

Yet, far from being rocky, this year turned out to be one of the least-volatile periods in market history. Consider these astounding facts:

  • The CBOE Volatility Index (VIX) hit 8.84 in July, the lowest level ever recorded in the VIX's 24-year history.
  • The largest peak-to-trough drawdown in the S&P 500 this year has been 2.8%, the smallest in any calendar year on record.
  • The S&P 500 is on track to rise every month this year, an unprecedented feat.

Perhaps the market will throw us a curveball and suddenly take a big dive in December, but even if it does, 2017 will forever be in the history books for its serenity. Anyone that was contrarian enough to bet on low volatility, especially by buying ETFs that short the VIX, has made off handsomely this year.

The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and the ProShares Short VIX Short-Term Futures ETF (SVXY) returned 140% apiece so far in 2017, making them some of the top-performing ETFs of the year.

 

Monster ETF Inflows

If there's one story we've written about the most at ETF.com, it's the record amount of money coming into ETFs this year. Every week, we've highlighted the billions of dollars worth of inflows that U.S.-listed ETFs are seeing.

As of last Thursday, the amount of ETF inflows for 2017 stood near $400 billion, blowing past the previous annual record from last year of $287.5 billion. If the pace keeps up, inflows for the year could eclipse $450 billion.

To put that in perspective, an average of $1.8 billion in new money has entered ETFs every trading session this year. There's now $3.27 trillion in U.S.-listed ETFs, up from $2.56 trillion at the start of the year.

There are a few reasons for this avalanche of money that's come into ETFs. The first is the ongoing trend of investors shifting from active funds to passive funds. It's the dynamic that's driving investors from largely active mutual funds to largely passive ETFs.

That passive-to-active shift has taken place for years now, and on its own, can't explain this year's record inflows. But add on top of that two other factors and it starts to make sense.

One is a general increase in confidence among investors about global equities. Every major economy is on track to grow this year, according to Charles Schwab, the first time that's happened in a decade. Moreover, confidence about U.S. equities in particular has been turbo-charged by expectations of corporate tax cuts. All this translates into investors wanting equities; ETFs are their preferred way to get that exposure.

Two, the fiduciary rule, which went into effect earlier this year, compels advisors to put investors’ interests first when choosing products for retirement. While the Department of Labor has delayed the total implementation of the rule until 2019, the consequences of it are clear―low-cost ETFs are the beneficiaries.

Fee War Heats Up

This brings us to the fourth big story of the year, the ETF fee war. Like the inflows, the fee war in the ETF space has been an ongoing theme, but one that seems to have reached a new gear in 2017.

Issuers are doing everything they can, including self-indexing, to bring expense ratios as low as they can go. Investors in turn are responding by rewarding the cheapest funds―even if they are only a basis point or two lower than the competition―with their assets.

According to FactSet, there are now 137 ETFs with annual expense ratios of 0.10% or less. Together, they hold 41% of all U.S.-listed ETF assets. In other words, only 6.5% of ETFs own 41% of ETF assets.

Along with exposure to broad market U.S. equity and bond ETFs, investors can now have access to smart-beta ETFs like the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) and single-country ETFs like the Franklin FTSE Italy ETF (FLIY) for less than 0.10%. Talk about cheap.

Contact Sumit Roy at [email protected]

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.