It’s that time of year… a look back at some of my favorite ETF charts and pictures from a wild 2020. Enjoy!
2020’s Biggest ETF Story:
ARK Invest takes the crown for 2020’s biggest ETF story. Why? Three reasons: performance, flows, and a potential takeover. 5 ARK ETFs are among the best performing non-leveraged or inverse ETFs this year, including 3 of the top 6! Unsurprisingly, eye-popping performance has been a magnet for investors, who have driven ARK’s ETF assets to over $35 billion. The Ark Innovation ETF (ARKK) recently surpassed the JPMorgan Ultra-Short Income ETF (JPST) as the largest active ETF, taking in a whopping $9+ billion this year alone. 2020 didn’t come up all roses for ARK, however. Their distribution partner, Resolute Investment Managers, exercised an option to take control of the firm. That drama, along with questions over whether Cathie Wood can maintain her hot hand, could make ARK an early contender for 2021’s biggest ETF story.
ETF story of the year?
— Nate Geraci (@NateGeraci) December 16, 2020
Bond ETFs: A Fall, the Fed, & Flows
Another ETF story dominating 2020’s headlines for a trifecta of reasons? Bond ETFs. When the Covid crash hit, bond ETFs faced their biggest challenge since launching in 2002. Several of the most popular bond ETFs traded at meaningful discounts to their net asset values, sparking debate over whether the products were broken or, instead, a better representation of the true value of the underlying bonds held. With the bond market teetering on the brink, the Federal Reserve announced a series of programs designed to inject liquidity and quell investor fear, including direct purchases of bond ETFs for the first time ever. The Fed-instilled confidence in the credit markets, along with how the ETF structure handled the crisis, manifested itself with record bond ETF inflows.
Source: SSGA’s Matt Bartolini
A look at the Federal Reserve’s current bond ETF holdings:
Source: Federal Reserve
Rise of JETS
The US Global Jets ETF (JETS) began March with approximately $35 million in assets. Three months later, the ETF eclipsed $1 billion as investors bet on a rebound in airline stocks, which had taken a beating as a result of the Covid-induced economic shutdown. Today, JETS’ assets stand at nearly $3 billion! Since its launch in 2015, JETS struggled to find a wide audience. It’s always a steep climb for thematic ETFs to find success. The ones that do usually achieve it on the back of strong performance. In this case, JETS was obliterated from February into March, down over 60%. It’s the rare occasion when an ETF’s assets jump following that type of negative performance.
Thematic ETFs & Retail Traders
One huge tailwind behind JETS’ success was the rise of the “Robinhood trader” in 2020. A combination of work from home (or not at all), stimulus checks, no sports and sports betting, $0 trading commissions, fractional shares, and personalities like Barstool’s Dave Portnoy, brought a new legion of younger investors into the market. That translated into a record year for thematic ETFs overall, including ETFs such as the Roundhill Sports Betting & iGaming ETF and the Global X Telemedicine & Digital Health ETF.
Source: Global X ETFs
Another top ETF story of 2020 involves the world’s largest oil ETF, the United States Oil Fund (USO). A combination of diminishing oil demand resulting from the Covid shutdown and too much supply (with nowhere to store it) sent oil prices into a tailspin. At one point, the May 2020 West Texas Intermediate oil futures contract actually went negative! Naturally, some investors attempted to play an oil rebound. As USO dropped 80%+, Robinhood traders (yup, them again) piled in. USO wasn’t designed to track the spot price of oil (no investment does this). Instead, USO holds front month futures contracts (or at least it did). Investors plowing money into the fund created a host of issues with managing those futures. While USO held no May contracts when they went negative on April 20th, the fund was forced to alter its portfolio to accommodate record inflows and extraordinary oil market conditions.
Source: Bloomberg’s James Seyffart
DFA’s ETF Entrance
Dimensional Fund Advisors (DFA) FINALLY made their ETF entrance, launching three ETFs in 2020. DFA also announced future plans to convert six existing mutual funds into ETFs and chop their fees. Why is DFA, an enormous player in mutual funds, finally getting involved in ETFs? A simple chart tells the story.
Source: RIA Intel
First Truly Free Stock and Bond ETFs
DFA wasn’t the only big player making their ETF debut in 2020. T. Rowe Price, Allianz, Wells Fargo, and BNY Mellon were among the fund companies entering the space. BNY Mellon entered the “ETF Terrordome” with guns blazing, launching the first zero fee stock and bond ETFs with no fee waivers or other restrictions.
Source: BNY Mellon
Non-Transparent ETFs Debut
Nearly a decade in the making, the first non-transparent ETFs launched in 2020. The idea behind the new structure (there are actually currently five of them) is to leverage the benefits of ETFs (namely tax efficiency, lower costs, and intraday trading), while protecting the “secret sauce” of active managers by cloaking holdings. The new structure could entice even more new entrants into the ETF space, though the jury is still out on whether investors will embrace the products.
Still. No. Bitcoin. ETF.
A sampling of ETFs launched in 2020: leveraged business development company ETN, global carbon futures ETF, commodity curve carry strategy ETF, CLO Bond ETF, US Cannabis ETF, Kuwait ETF, and a SPAC ETF. Not launched? A bitcoin ETF. Bitcoin is up over 250% in 2020. Unfortunately, investors still can’t own it through an ETF. 7+ years after the Winklevoss Twins (yes, the guys involved with early days of Facebook) attempted to launch the first bitcoin ETF… well, we’re still waiting. Maybe next year? A timeline of bitcoin ETF filings and disapprovals…
Source: ETF.com’s Drew Voros
Record ETF Flows
In a year witnessing an unprecedented (yes, this word must be included in any year-end wrap) market drop, ETFs eclipsed $5 trillion in assets and will break their annual inflow record with over $500 billion in net new assets. As it turns out, we’ve seen this movie before in 2008 and the fourth quarter of 2018. When there’s a big market decline, ETFs are the beneficiaries as the market recovers. Why? Two reasons:
->Investors realize their expensive mutual funds failed to protect them from the downturn (in fact, many actually underperformed).
->When investors are sitting on sizeable gains, they’re hesitant to sell and take a tax hit. When stocks nosedive, it provides an opportunity to remove the mutual fund capital gains padlock. Investors can sell expensive, underperforming funds without paying Uncle Sam. This money then flows into lower cost investments such as ETFs.
2020 proved no different.
ETF Naysayers Dwindling
In the bull market run prior to the Covid crash, ETF naysayers continued shouting from the rooftops that “ETFs aren’t battle tested” and “ETF liquidity will dry up”. Instead, during March’s market meltdown, stock and bond ETFs saw record trading volume. They survived, and even thrived, in battle. Liquidity didn’t dry up. CNBC personality Jim Cramer, a chief ETF naysayer whose comments are captured below, is the perfect encapsulation of a dwindling breed of ETF naysayers, who despite their best efforts, can’t derail the ETF freight train.
Source: Bloomberg’s Eric Balchunas
ETFs and the Future
So, what will 2021 hold for ETFs? If 2020 is any indication, ETF growth is accelerating. Between the way ETFs handled the Covid crash, Vanguard encouraging clients to switch from mutual funds to ETFs, DFA converting mutual funds to ETFs, Fidelity launching their flagship Magellan fund in an ETF, among other things, ETFs are gathering steam. ETF Trends’ Dave Nadig projects ETF assets will surpass mutual fund assets in 2027.
ETF Chart of Year
It’s only fitting the ETF chart of the year depicts the astounding asset growth of five ARK Invest ETFs. The success of ARK and Cathie Wood will be discussed and debated for years. These five ETFs began 2020 with around $3 billion in assets. Simply amazing.
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