ETFs are experiencing record popularity.
The industry hit a milestone with more than 3,000 ETFs trading simultaneously for the first time this month, a 30% increase since December 2020, according to Morningstar.
And this year investors are embracing more active strategies, such as single-stock ETFs that give traders exposure to the daily performance of a singular stock like Tesla or Apple.
“We basically started by taking very broad index funds: SPY [SPDR S&P 500 ETF Trust] was the first, and then the industry over the years created all these interesting overlays,” Nick Colas, co-founder of DataTrek Research, told Bob Pisani on CNBC’s “ETF Edge” this week.
Sector and emerging funds were included, as well as specified funds for topics such as clean energy and legal marijuana, Colas said, as part of a shift from disruptive innovation to the mainstream.
“Investors now really want to be able to choose not just the big sector funds or the big general funds, but any kind of fund that they think might be interesting,” he added.
However, this move toward the specificity of thematic ETFs like cybersecurity ETFs has its risks, according to investment consultant Charles Ellis, author of two upcoming books, “Inside Vanguard” and “Figuring It Out.” While Ellis believes that those who get into ETFs to later dive into index funds will do well, those who choose highly specialized ETFs run the risk of making disastrous mistakes.
“The more specific you are, the more likely you are to be unable to make a rational long-term decision and be tricked into making, because we’re all human, an emotional short-term decision, and you won’t like the outcome in the long run.” , Ellis said.
With the number of ETFs growing rapidly, investors will soon celebrate another milestone. In January 2023, the first ETF, SPDR S&P 500 ETF Trust, will turn 30 years old. Now the largest ETF and one of the largest funds in the world, SPY is valued at $350 billion in assets under management.
Colas said SPY was exactly the right product to start with, unlike emerging market ETFs that had dismal returns after their boom-and-bust cycle.
The growth of ETFs and more active funds comes in part from people converting mediocre mutual funds to ETFs, Pisani said. Colas said there are fewer fees associated with ETFs than mutual funds, as well as fewer tax obligations.