Over the past six months or so, I have written about a lot of areas within the financial markets that have received fantastic amounts of money.
Hearing about the failing economy, the amount of unemployment that exists, the looming possibility of business failures and the suffering many people are going through capture much of the headlines.
But, in other areas, business is expanding hand-over-fist as money is oozing out all over the place.
Now, we gather a picture of another sector, the ETF sector, and learn how this particular space is prospering.
Global assets held by exchange traded funds have topped $7.0 trillion for the first time ever.
In the Financial Times we read,
Aggressive steps by policymakers have encouraged investors to plough $428 billion in new cash into ETFs so far this year, up 57 percent compared to the same period last year….”
Note further, that the industry has been growing for the past 15 months straight, as it even recorded positive numbers in February and March, a time when the equity markets were dropping due to the spread of the coronavirus pandemic and the start of the current recession.
The Financial Times article also points out that the two largest asset managers in the world, Vanguard and BlackRock (NYSE:BLK), benefited greatly from the inflows into the industry this year.
Vanguard, through August, has experienced an inflow of just under $115 billion, while BlackRock has taken in $98.6 billion. Not bad.
ETFs Should Love The Federal Reserve
ETFs, in my view, should love the Federal Reserve System.
Over the past ten years or so, I have written many articles about how the Federal Reserve has underwritten the stock market, helping the market to achieve relatively steady new historical highs throughout the full economic recovery from the Great Recession.
In fact, the Federal Reserve did such a fantastic job in achieving relatively steady new highs that the effort resulted in a major change in the asset management industry.
As Chris Flood writes in the Financial Times article, ETFs were regarded as a relatively insignificant part of the industry before the 2007-2008 financial crisis. Active fund managers dominated the industry and going into the economic recovery was the choice place for investor funds.
The Fed changed this. With the stock market rising steadily during the recovery, the risk-return tradeoff achieved by active managers and passive managers changed. During this time, active managers did not appear to be providing the results, given their cost, that the steadily increasing performance of the ETFs gained.
So, throughout the expansion, investors started shifting their funds toward the ETFs and away from funds that relied upon active trading.
Since the start of 2009, ETFs have gained a net new cash total of $4.3 trillion. The industry is different now than it was before the Great Recession.
And, to indicate how important the Fed is to the ETF industry, as a part of the Fed’s crisis management to combat the looming financial market liquidity concerns in March, the Fed decided to use fixed-income ETFs to help stabilize the bond market.
Where The Benefits Go
The Federal Reserve has been given much credit for what has happened over the past twelve years or so. The Great Recession was a severe setback to the US economy and the Federal Reserve had to respond aggressively to get the economy moving again.
Economic growth during the latest economic expansion was never that great; the compound rate of growth for the economy during the expansion was only 2.3 percent, and inflation remained below the Fed’s target rate for the entire period of the recovery. The Federal Reserve policy was set to err on the side of monetary ease since the economy was not doing all that well.
So, the United States experienced three rounds of quantitative ease and further efforts to keep the economy on track. The Federal Reserve has been applauded for the work it did at this time.
But, one of the major beneficiaries of this policy stance was the ETFs. No question. And, a lot of money was made.
Then the pandemic hit the United States and the economy was thrown into another recession.
The Federal Reserve responded again to support the financial system and billions of dollars were injected into the banking system to keep everything functioning.
As we have seen above, one of the major beneficiaries of this policy stance was the ETFs. No question. And, again, a lot of money is being made.
The economy is accumulating a lot of market distortions these days. This is what happens in a crisis period.
We have spent a long time getting here. Most of the time has been pretty nice sailing. The economy has been growing. Unemployment, before the current recession, had hit a 50-year low. The stock market has experienced a fantastic run. And, income inequality had reached new highs since the end of World War II.
But the market distortions do eventually work themselves out. Thus, once things settle down, the Federal Reserve is going to have to reassess things, the federal government is going to have to reassess things. There will need to be a period in which investors have to sort things out.
Do we have an answer for this right now? No, we do not.
This is a period of “radical uncertainty,’ one in which we don’t really have the ability to know what are all the unknowns of the future.
Investors need to be aware of this radical uncertainty because we don’t know what shocks are ahead. But, for now, investors don’t want to miss out on all the money that is around. And, that is why ETFs are flourishing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.