30 years ago, the SPDR S&P 500 ETF Trust, the first of its kind, launched and revolutionized investing by allowing investors to buy and sells stocks via one publicly-traded share—the birth of the passive investing strategy. Now, the market is bursting with ETFs that track a variety of asset classes, sectors, and themes, a fundamental shift in investing that few foretold upon SPDR’s launch in 1993, contends an article in The Wall Street Journal.
Though it didn’t seem that revolutionary at the time, ETFs are now incredibly popular thanks to their low fees and a tax structure that is more friendly than traditional mutual funds. And ETFs are broadening quickly into active management and specialized investing products such as leveraged and inverse funds. ETFs have also made investing more available to more people, though some believe that ETFs that use leverage are becoming too prevalent and could entrap less-experienced investors, according to the article.
While ETFs have crept up on mutual funds for the last several years, they gained much ground in 2022, when the funds raked in nearly $600 billion while investors drained almost $1 trillion from mutual funds—the biggest in/out flow gap on record, according to Morningstar Direct data. Though ETFs are still far behind mutual funds—they closed 2022 with $6.5 trillion in assets compared to $16.3 trillion for mutual funds—they hold several advantages over the more traditional mutual fund. Fees are much lower for ETFs, and they can be traded all day long, as opposed to mutual funds which price only at market close. And many investors who rebalanced their portfolios last year turned to ETFs. “When you have underperforming active managers with a high fee, and you’re getting hit with a capital-gains tax, that’s going to lead people to leave,” Matthew Bartolini of State Street Global Advisors told The Journal.
Last year’s slowdown also gave smart investors a chance to sell off mutual funds at a loss and write it off on their taxes—a strategy known as tax-loss harvesting—and quickly buy an ETF. And as active strategies become more popular and new investing products emerge, ETFs look more appealing. Even ETFs that did badly last year, such as Cathie Wood’s ARK Innovation, still sees droves of investors buying into it, along with other speculative ETFs. As for ETFs that use leveraged funds, “I hope for the sake of the investors who are using leveraged funds, they really have done their homework and understand the risks that are inherent with these products,” Elisabeth Kashner at FactSet told The Journal.