Exchange-traded funds —more commonly known as ETFs — have transformed the financial landscape.
And lately, ETFs actually became a beacon for everyday investors as they navigated rising rates and inflation.
Investors have poured $610 billion into US equity ETFs and $332 billion into US bond ETFs since the end of 2021 — with $408 and $196 billion of that being in 2022, despite stock and bond prices falling more than 10% that year (as of 12/31/22)*. We’ve seen the same phenomenon on our own platform, as ETF volumes on eToro’s global site grew throughout 2022.
People think everyday investors have given up on the market, but we’ve noticed the opposite. Investors used an especially calamitous environment to learn more about how different investments work, and ETFs seem to be at the forefront of their strategies.
We wanted to know why people are leaning into ETFs so much these days. So, we turned to the specialists — iShares, the ETF arm of BlackRock and the world’s largest ETF provider, with over $3 trillion in assets under management.1
Here’s what Gargi Pal Chaudhuri, head of iShares Investment Strategy and Markets Coverage, said about why everyday investors have embraced ETFs in such unpredictable times and what that could mean for the future of investing.
Gargi Pal Chaudhuri, Head of iShares Investment Strategy and Markets Coverage
What Gargi said
Why were investors leaning into ETFs in 2022? What about the market environment made ETFs so attractive?
Investors tend to embrace ETFs for liquidity during volatile markets. Because ETFs trade like a stock, they offer investors the ability to move in and out of different exposures when it makes the most sense for them.
While markets spiraled back down to earth in 2022, ETF usage soared as the investment vehicle of choice amid this volatility. ETFs as percentage of total equities traded on exchanges averaged 32% for the year — a significant step higher than the 25% from the previous four years.2
We’ve had a better year in 2023, but it hasn’t been easy. How are everyday investors using ETFs to get ahead in these markets?
By combining the diversification benefits of mutual funds with the ease of stock trading, ETFs are able to provide investors with a simple way to access various investment opportunities and to navigate a fast-changing market environment.
With elevated interest rates and a slowdown of inflation (as measured by Core CPI) in 2023, we have seen investors move up in quality in both equity and fixed income allocations using ETFs. For example, US investors have added more than $28 billion into quality-focused ETFs as of the end of October.3
Investors also added more into fixed income ETFs with the “yield reset.” Fixed income ETFs have attracted $151 billion from investors this year, with massive inflows into Treasury ETFs across different maturity terms.4
As we continue to see uncertainty in 2023 driven by rising yields and increased geopolitical tensions, investors have managed investment risks using defensive ETF strategies such as minimum-volatility factor ETFs.
Your bond ETFs have been some of the most popular ETFs on our platform. And TLT, your long-term government bond ETF, traded record volume in October. Why are bond ETFs so popular these days, and how are investors using them?
While TLT’s price has dropped 50% from its peak, it has attracted more flows than any other bond ETF this year.5 We think bond ETFs are becoming more popular for a few reasons:
First, fixed income opportunities are becoming more and more attractive in today’s market environment, as the yields that are now being offered in fixed income are much higher compared to yields in the previous decade.
Second, we have seen both retail and institutional clients turning more to bond ETFs because of their transparency, liquidity, efficiency, and precise access to exposures. 90% of the largest global asset managers use bond ETFs in their open-end funds6, according to Morningstar, while 80% of the largest US insurers use bond ETFs.
Third, investors are increasingly using bond ETFs to achieve a lot of different types of outcomes, instead of viewing them as just blunt instruments to provide general exposure. Investors can now use them to get very specific exposure to things such as securitized mortgages or triple A collateralized loan obligations, or to customize their portfolios by using laddered maturity strategies or buy write strategies.
When should an investor consider an ETF vs. say, single stocks?
At iShares, we do not necessarily see ETFs and stocks as a zero-sum game. Both may be able to play an important role in investors’ portfolios. In addition, there are key differences between individual stocks and ETFs that investors may want to be mindful of, including the fact that with an individual stock, an investor actually owns that stock, but investors in an ETF do not own its underlying holdings (i.e. the securities within the ETF).
That said, the two key advantages that ETFs have over individual stocks include their potential built-in diversification and the convenient exposure they provide to different asset classes.
The first advantage is diversification, which can be understood as the process of not putting all of your eggs in one basket. By spreading your money across different investments, you may be able to generate returns in a variety of market dynamics. Now, an investor may be able to accomplish this by purchasing a few stocks on their own, but this can be costly in terms of time and money. On the other hand, with the purchase of one ETF, an investor may be able to achieve the same (or maybe even better) results in a more efficient way (again, both in terms of time and money). This is because one ETF may hold hundreds, sometimes thousands, of securities.
The second advantage is that ETFs offer convenient exposure to different asset classes. Individual stocks have their own unique characteristics and risk profiles, and these attributes may make them more attractive in certain market environments, but not others. For instance, as we have talked about, bonds are back today, but investing in bonds directly may be logistically challenging for some investors (not to mention expensive). On the other hand, bond ETFs may provide exposure to bonds in a fund that can be bought or sold whenever is most convenient for the investor. And ETFs can hold other types of asset classes as well, such as real estate or commodities. The key takeaway is that ETFs may be able to help investors gain exposure to asset classes outside of individual stocks, which can also help simplify the process of building a well-rounded, diversified portfolio.
What’s the next step for ETFs? How do you make them even more helpful for today’s investor?
As a member of the iShares Investment Strategy team, we help provide investors with the latest market insights and ETF implementation ideas as we navigate market opportunities. We don’t only focus on key market trends and investment views, we also generally help clients identify ETF solutions to access those exposures. And we’ve been seeing tremendous innovation across the ETF landscape. There are a few product trends we are keeping tabs on.
One is outcome-oriented ETF strategies such as buffer ETFs. These ETFs offer convenient, liquid, and cost-effective access to an options-based risk management strategy.
Another product trend is around thematic ETFs. These ETFs help investors target long-term societal trends that could meaningfully transform economies and markets, such as technological innovation and geographic fragmentations. At iShares, we call these societal trends ‘mega forces’. While spotting these growth trends may be intuitive, picking the companies who may benefit the most may be challenging, not to mention risky. By grouping companies that may benefit from those on-going transformations into a single investment, thematic ETFs help reduce overall portfolio risk.
An additional product trend is around target date ETFs. Earlier this year, iShares launched the only target date ETFs in the marketplace. These ETFs give investors the ability to prepare for retirement outside of a 401k through a glidepath investment strategy, whereby the ETF gradually adjusts its strategy from aggressive to conservative as it becomes closer to its target retirement year.
Last are active ETFs. Active ETFs AUM grew at an organic rate of 14% during the first half of 2023, compared to a 3 percent growth rate for index-tracking ETFs.7 Active ETFs, often with the goal to outperform the benchmark, can also help to meet different investor needs.
So what does this mean for me?
Think outside the stocks. Single-stock investing is the most well-known strategy, but it isn’t the only way to invest. ETFs can help you invest in a theme, sector, or market without needing to dig through a bunch of single names. And ETFs aren’t just used to capture market gains — they can help generate income and offer tax efficiency..
If you want to learn more about ETFs, check out the eToro Academy. We have a brand new set of courses on how ETFs work, thanks to our partnership with iShares.
Consider what’s moving. Volatility is what drew people into ETFs in 2022. Even though stocks are calmer this year, other markets are moving. Treasuries seem to be capturing a lot of attention lately, and gold just recently hit a record high (as of 12/1/23)*. Think about how other markets can fit into your portfolio, even if they don’t fit your typical routine. And by the way, you can trade both Treasury- and gold-linked ETFs.
Practice, practice, practice. Not ready to invest yet? That’s fine — there are a bunch of ways you can keep learning. Two tools that can help are eToro’s Virtual Portfolio and Draft Trading tools. Create an account with us, and you can practice investing without risking any of your hard-earned money.
*Data sourced through Bloomberg. Can be made available upon request.
1 Source: BlackRock, as of September 30, 2023.
2 Source: Bloomberg, as of November 02, 2023.
3 Source: Bloomberg as of November 02, 2023. ETF groupings determined by Markit.
4 Source: Bloomberg as of November 02, 2023. ETF groupings determined by Markit.
5 Source: Bloomberg as of December 04, 2023.
6 Source: Morningstar. 12 month holdings as 09/30/23.
7 Source: Morningstar, as of June 2023.
Gargi Pal Chaudhuri, Head of iShares Investment Strategy and Markets Coverage, BlackRock
Gargi Pal Chaudhuri is Head of iShares Investment Strategy and Markets Coverage at BlackRock. Based in New York, she and her team focus primarily on investment research, delivering investment insights and tying it to ETF implementation, and trading guidance to both retail and institutional clients of the firm. With over two decades of experience in the financial services industry, Gargi has built her career around portfolio management in the fixed income markets, trading and macro strategy. She regularly contributes her macro and financial market views across global media outlets for clients in US, Canada and Latin America.
Disclaimer:
This communication is in collaboration with iShares by BlackRock. BlackRock and iShares are trademarks of BlackRock, Inc. or its affiliates (together “BlackRock”). BlackRock does not sponsor or endorse any content outside the ETF Academy and is not affiliated with eToro or any of its affiliates.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation. Any references to past or future performance of a financial instrument, index or packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro encourages its customers to carefully consider the funds’ investment objectives, risks, and charges and expenses carefully before investing. This and other information can be found in the funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting each fund company’s website or www.sec.gov/edgar/search. For iShares Funds, please visit www.iShares.com/prospectus. Read the prospectuses carefully before investing.
Investing involves risk, including possible loss of principal. Diversification and asset allocation may not protect against market risk or loss of principal. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Transactions in shares of ETFs may result in brokerage commissions and may generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.
There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.
Buying and selling shares of ETFs may result in brokerage commissions. When comparing stocks or bonds and ETFs, it should be remembered that management fees associated with fund investments are not borne by investors in individual stocks or bonds.
Actively managed funds do not seek to replicate the performance of a specified index. Actively managed funds may have higher portfolio turnover than index funds.
Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in the value of debt securities. Credit risk refers to the possibility that the debt issuer will not be able to make principal and interest payments.
Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market.
Each target date fund has a number (a target date) at the end of the name that designates an approximate year when an investor plans to start withdrawing their money. The asset allocation of the fund will become progressively more conservative as the specified target date approaches. An investment in the fund is not guaranteed, and an investor may experience losses, including near, at, or after the target date.