Mutual fund giant Vanguard popularized low-cost passive investing through index funds. It is now a leader in the growing exchange-traded fund (ETF) market. These are some of the most popular and cost-effective investment options available to investors.
Investors can purchase ETF shares on stock exchanges just like shares in a corporation. ETFs are baskets of securities that track a corresponding benchmark index and are readjusted automatically. One of their best features is that they come with very low fees. The types of ETFs are endless, ranging from bond ETFs and market ETFs to inverse ETFs, foreign market ETFs, and alternative ETFs.
Vanguard has more than $2 trillion in ETF assets under management (AUM). BlackRock (BLK), which sponsors the iShares family of ETFs, is the only other firm at that elite level. But these two companies aren't the only ones active in the ETF market. Keep reading to learn more about the top five ETF issuers.
Key Takeaways
- ETFs are among the most popular and affordable investment options available to investors.
- Vanguard, BlackRock, and State Street dominate the ETF market with the most offerings.
- The five largest ETF issuers have more than $100 billion each in ETF assets under management.
- The SEC is concerned that these leaders may stifle competition and prevent new entrants in the market.
The Big 5 ETF Issuers
There are five issuers with $100 billion or more in ETF AUM:
- iShares (BlackRock): $2.59 trillion
- Vanguard: $2.36 trillion
- SPDR (State Street): $1.22 trillion
- Invesco: $454.78 billion
- Charles Schwab: $320.21 billion
The Biggest ETFs
All 50 of the biggest ETFs, which range from $23 billion to $329 billion in AUM, are offered by these five top issuers. The five largest funds are:
- SPY - $501.50 billion
- IVV - $450.03 billion
- VOO - $420.71 billion
- VTi - $380.70 billion
- QQQ - $258.64 billion
Among the 50 largest ETFs, BlackRock offers 18, Vanguard sponsors 20, and State Street issues seven.
As passive index-linked ETFs became an increasingly popular alternative to index mutual funds, they represented a logical brand extension for Vanguard, which created the index fund concept.
Investors can now invest in cryptocurrency-related ETFs. The SEC approved 11 Bitcoin ETFs in January 2024. The Grayscale Bitcoin Trust (GBTC) and the Bitwise Bitcoin ETF (BITB) are among the newly issued ETFs. These investments trade on several exchanges, including the Nasdaq and NYSE Arca.
Factors Spurring ETF Growth
Passive Funds Outperform Active Funds
According to Morningstar, passively managed funds ended 2023 with more assets than active ones. The company's report found that international equity and bond funds are following trends in the U.S. market by favoring passive funds.
Active equity funds experienced larger outflows during 2023. Roughly $14 billion worth of investor funds were taken out of active funds. Passive funds, on the other hand, increased in value during the year by $244 billion.
ETFs Popular With Institutional Investors
While ETFs are mainly viewed as a low-cost vehicle for individual investors, they are also popular with institutional investors. Professional investment managers are increasingly seeing ETFs as a cost-efficient tool for managing risk and making quick portfolio shifts. Roughly $1.3 trillion of ETF assets are owned by institutions.
Vanguard patented a scheme to reduce capital gains taxes on its ETFs, as detailed by Bloomberg. This process offered a competitive advantage, but Vanguard chose to keep quiet about it, fearing regulatory action to curtail it. The patent expired in May 2023.
Regulatory Concerns
The dominant position of major players like BlackRock, Vanguard, and State Street has raised concerns among regulators, particularly the Securities and Exchange Commission, that they may be in a position to stifle competition. These three firms control roughly 80% of the ETF market, which is a very high concentration ratio.
According to the SEC, consolidation and compression in the industry may be cause for concern for investors. But, there is some disagreement in the industry, notably from theInvestment Company Institute (ICI) which stated there is still room for smaller players to forge a place for themselves in the market.
8,754
The total number of ETFs worldwide as of 2022.
The Landscape for New Entrants
According to Morningstar, U.S. investors can choose from 3,500 different ETFs, including 520 new launches. The company also reported that 244 funds closed in 2023. These funds represented $54 million in managed assets.
Although there may be room for new entrants in the market, they do face challenges. For instance, they may have trouble complying with regulations and marketing their products. Outside help can often cost anywhere between $270,000 to $370,000 annually, plus a percentage of assets.
How Do ETFs Work?
Exchange-traded funds work like mutual funds and stocks. That's because they are pooled investments that trade on stock exchanges. Money from multiple investors is collected and invested in a basket of similar securities. For instance, a gold ETF may invest in multiple gold companies while
How Do I Buy and Sell ETFs?
Exchange-traded funds trade just like stocks on exchanges. This means you can buy and sell shares through your brokerage account or investment professional. You can also invest indirectly in ETFs by buying shares of mutual funds that have them in their portfolios.
How Do I Choose the Best ETF?
Choosing the best ETF is the same as selecting any other type of investment. The ETFs that work best for you depend on your investment goals, risk tolerance, and investment strategy. When you're researching which ETFs to add to your portfolio, be sure to also consider any associated risks, costs, and advantages.
The Bottom Line
Investing in ETFs is a great way to diversify your portfolio. These investments track a specific sector, index, industry, or asset, and come with low fees. You can purchase shares the same way you would those in a publicly traded company.
Vanguard, which created passive investing through index funds is one of the major players in the ETF industry. Investors can also choose from ETFs offered by BlackRock, which runs the iShares portfolio, Invesco, State Street, Charles Schwab, and other smaller players. But remember, before you invest your money, make sure you consult a qualified financial professional to see if ETFs are right for you.
