Bloomberg reported this morning that, for the first time, the value of transactions in exchange-traded funds (ETFs) that track the Standard & Poor’s 500 Index is set to surpass the turnover for all the stocks in the benchmark gauge of American equity.
Dollar volume in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY), the iShares S&P 500 Fund (NYSEMKT: IVV) and the Vanguard S&P 500 ETF (NYSEMKT: VOO) reached a 12-month average of $28 billion a day last month, according to data compiled by Bloomberg and Goldman Sachs Group Inc. (NYSE: GS). That is 98% of the trading in the index’s companies, including Apple Inc. (NASDAQ: AAPL) and Exxon Mobil Corp. (NYSE: XOM).
The data shows that since the financial crisis, investors have flocked to securities that replicate benchmark returns. Investors are giving up on picking stocks and searching for value in favor of automated strategies.
However, demand for the ETFs, which did not exist 20 years ago, also shows that individuals and institutions have not given up on owning equities. Perhaps they are just fed up with the fees that managers charge without delivering adequate returns.
ETFs provide investors with a cheaper and quicker way to get in and out of the entire equities market. It is a way of getting diversification and risk exposure without the additional volatility of individual securities.
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