🔥 Big ETF rush
The ideal investment amid pandemic
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The Big StoryÂ
History seems to be repeating itself for the exchange-traded funds (ETFs), and it's happening in the best way possible.Â
When the 2008 financial crisis first hit the world, investors grew wary of money managers investing their hard-earned money haphazardly into the stock market. So instead, they invested in more transparent and passive instruments like ETFs, which boosted the ETF market and resulted in the business crossing the $1 trillion mark in 2010.Â
And now, this phenomenon is recurring amid the COVID-19 pandemic. Â
In the first half of this year alone, ETFs have lured in more money than they have in any calendar year ever! According to Bloomberg, US ETFs raked in $488.5 billion this year and are on track to break the $497 billion record set in 2020 in the coming weeks.Â
How did this happen? Due to the historic stock rally, the benchmark S&P 500 index repeatedly recorded all-time highs last year. These rallies hugely benefited the Big Three ETF leaders—Vanguard, BlackRock, and State Street—that collectively own 22% of S&P 500 companies and make up for the majority of the ETF industry.
While ETF markets are thriving, mutual funds—one of the favourite ETF alternatives—faced an opposite reality. The industry reported a total net outflow of $506 billion last year as investors migrated to cheaper and tax-efficient investment vehicles. Some analysts considered this capitulation to be a further validation of the ETF ecosystem.
Witnessing the Big Three's success in the growing ETF market, many Wall Street firms are now finding ways to launch their own funds. In fact, the US saw its first mutual funds to ETF conversion this year after a small company converted its mutual funds into ETFs in March.  Â
But ETFs are relatively newer investment vehicles. The earliest ETF dates back to the early 1990s when it first emerged as an outgrowth of index investing, thanks to American mutual funds legend John Bogle, who first highlighted the growing appetite of investors in such instruments. Consequently, the State Street Global Investors launched the first ETF called SPDRs (short for 'spider') on the American Stock Exchange in 1993.Â
But it would take nearly nine years more for ETFs to reach India when Nippon India Mutual fund launched the first-ever Indian ETF on the Nifty 50 Index in 2002. The ETF was launched on the National Stock Exchange (NSE), which celebrated the listing of its 100th ETF this month.
Why the rush? The growing acceptance of passive investment instruments and increased retail participation amid the pandemic has led many firms to introduce theme-based ETFs—a trend popularized by Cathie Wood's Ark Investment Management that accumulated $15.3 billion in 2021 for making thematic investments in growing sectors like AI and robotics.
Meanwhile, in India, the government also reduced securities transaction tax (STT) to just 0.001% to further encourage people to invest in equity ETFs.Â
Well, not so fast!
While ETFs may seem like one of the safest instruments out there, they're not devoid of flaws. And there are quite a few that you should be aware of before you start investing in ETFs.
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