Finding Alphas, 2nd Edition

29ETFs and Alpha Research

By Mark YikChun Chan

Exchange-traded funds (ETFs) are investment funds that are traded on stock exchanges. Most of them track an index, such as a stock or bond index; the first such fund, SPDR S&P 500 ETF Trust (SPY), was created in 1993 to track the S&P 500 index. Since then, the ETF universe has expanded rapidly. Today the underlying assets held by ETFs span a broad spectrum that includes not only equities but also bonds, commodities, currencies, and more.

According to research firm ETFGI, as of the end of October 2018 there were 5,785 ETFs and 7,616 exchange-traded products (ETPs) globally, with assets under management (AUM) of $4.78 trillion and $4.94 trillion, respectively (see Figure 29.1). Although the US market has dominated these vehicles – with 1,966 ETFs and 2,210 ETPs, and assets of $3.42 trillion and $3.50 trillion, respectively – the ETF markets in Europe, Asia, and Canada also have experienced steady growth. The huge rise in assets has come with proliferating liquidity, making the instruments more attractive to investors.

Figure 29.1 Global ETF growth, 2008–2018

Source: ETFGI. ETFGI, based in London, is a leading independent research and consultancy firm covering trends in the global ETF/ETP ecosystem.

Undoubtedly, ETFs are an emerging asset class, but the more intriguing questions are, first, whether they can become a new source of ...