The first US exchange-traded fund - tracking the headline S&P 500 index - was launched in January 1993.
It makes sense then that many observers consider the American ETF market to be around a decade ahead of the UK - which launched its first ETF in 2000.
According to the Investment Company Institute an estimated 4% of US households own ETFs. No wonder, these are low-cost, transparent and easy to use vehicles which can be used to create the building blocks of a balanced investment portfolio.
Regulatory changes mean the UK is hot on the heels of the US when it comes to ETFs and by looking across the Atlantic we can have some idea of how the UK ETF market might look in the coming years. We therefore explore three key attributes enjoyed by the US ETF market.
CHOICE OF MARKETS
With the rapid increase in demand, sponsors have offered more ETFs with a greater variety of investment objectives. As of 2017 there are more than 2,000 US-registered ETFs, up from 119 at year-end 2003.
With such a large number of products available, there are few markets, asset classes or sectors which you cannot access in the US. Although investors in the UK have a pretty good choice it still lags some way behind the UK.
Growth in the US ETF market is slowing as it becomes increasingly saturated. This may be bad news for providers of ETFs but for investors it is great news as the increasingly cut throat competition helps reduce costs.
You should expect to see consolidation among the different providers in the UK ETF market as it matures -which in turn should see fees come down and liquidity improve.
In June 2014 iShares rolled out its 14-strong Core series in the UK, some of which have ongoing charges of just 0.07%. And, in the intervening three years, many other providers have followed with low-cost products of their own.
GRANULARITY
Another positive for US investors in ETFs is that there is a greater degree of granularity. Or in layman's terms it is possible to buy products which drill-down into specific market niches or sub-sectors.
There are even products offering exposure to certain long-term investment themes. One example is the Robo-Stox Global Robotics & Automation ETF - which tracks the emerging robotics industry. Though in a sign that the UK is catching up with the US the product, ROBO Global Robotics and Automation GO UCITS ETF (ROBO), was launched by provider ETF Securities on the London Stock Exchange in October 2014.
INNOVATION
The US is also ahead of the curve when it comes to market innovation. It was the first market to see ETFs offering exposure to bond markets in 2002 - an increasingly popular niche within the ETF space.
In early 2008, the SEC granted permission to several ETF providers to offer fully transparent actively managed ETFs that meet certain requirements.
Actively managed ETFs do not seek to track the return of a particular securities index. Instead, an actively managed ETF’s investment adviser, like that of an actively managed mutual fund, is able to create a unique mix of investments to meet a particular investment objective and policy. This might be companies with a high yield, for example.
There are still only a relatively small number of London-listed active ETFs at present but we should expect this area to grow in the coming years.
