The Evolving ETF:
Using Exchange-Traded Funds

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February 21, 2020

The reasons for allocating to exchange-traded funds (ETFs) are myriad. Among the attributes cited for their popularity have been their relative tax-efficiency, their speed of trade – in that you can buy or sell intraday - and comparatively low cost (versus mutual funds). But are ETFs for a new generation of investor or are seasoned investors owning mutual funds also seeing their attraction?

The Evolving ETF: Using Exchange-Traded Funds

Assets under management in the more than 2,300 ETFs available from some 136 providers reached a record $4.4 trillion in 2019, up 30% over 2018.1 This is still a long way off the size of the US mutual funds industry, with more than 9,500 vehicles and over $17.7 trillion in assets under management2, but the ETF universe is growing rapidly and analysts expect further inflows and launches this year.

This is partly because last year the SEC made ETFs more accessible by “modernizing”3 regulation of ETFs, helping to lower the barriers to entry. This encouraged greater competition by enabling more providers to come to market, improving investors’ choice.

Does this popularity and growth indicate that ETFs will become the investment vehicle of choice to the exclusion of all others? Not necessarily. For many, an ETF is an additional way of pursuing investment returns while managing risk, a way that can work on its own or in tandem with new and existing mutual fund holdings.

Who is using ETFs?

The growth and popularity of ETFs in the US is not new news but research offers some surprises about who is using ETFs, their place in a portfolio and how they’re perceived by advisors. ETFs increasingly offer something for everyone regardless of age, investment goal or risk tolerance. For financial advisors, wealth managers, broker-dealers and registered investment advisors (RIAs), ETFs can offer customizable solutions and lower-cost access to markets, countries and sectors than many comparable investment vehicles can provide.

Research from BNY Mellon’s, Pershing, has highlighted that the majority of advisors using ETFs indicate they are core to their clients’ portfolios, while a few were using them for exposure to rising sectors or outlying strategies, while others for diversification. At a Barron’s event in 2019 advisors said similar things, noting in particular, they don’t consider ETFs to be a strategy in themselves so much as a tool best used for rapid portfolio allocation decisions as well as hedging.

An increasingly hyper-connected world means market events, both positive and negative, occur with ever-increasing speed. ETFs allow for intraday trading, something that’s frequently cited as an advantage over mutual funds, especially in times of increased market volatility.4

A widespread assumption is that ETFs particularly resonate with younger investor demographics. However, Pershing’s survey found that older generations, baby boomers (age 51-70) in particular, were the highest users of ETFs by generation.

Geographic exposures

ETFs are a unique and broad-based solution with the same minimum investment size and cost structure, whether it’s an institutional investor, financial advisor or direct investor.

However, there are some interesting trends regardless of the differences between types of investors. For one, equity ETFs are still favoured over bond, commodity and specialist vehicles such as those that invest in companies strong in ESG issues (environmental, social and governance).5

Global ETF inflows show equity ETFs have a 75% market share versus 19.6% for fixed income. Large cap indices are favoured most with an almost 18% market share. The US is the place where most ETFs are domiciled with the country showing a 72% market share of the ETF universe, according to Morningstar figures as at February 2020.

Domestic investors also seem to prefer their home market above all others, such as Europe. Three of the top-five largest ETFs by assets under management track the S&P 500 index while the other two are linked to the Nasdaq.6

Meanwhile in Europe, thematic funds appear to be taking hold. ETFs tracking baskets of stocks or bespoke indices containing companies that relate to industries such as artificial intelligence, video gaming, e-sports and cybersecurity are just some of the thematic ETFs launched in 2019. This is part of the trend in Europe that has seen such specialist vehicles more than double in size in the past two years.7 However, there are still questions about how to evaluate and integrate these products into an existing portfolio, according to news reports.8

What’s next?

Although ETFs are becoming increasingly popular, and one that’s rapidly growing across all distribution channels, industry misconceptions about who is using them and how, remain.

The use of ETFs in portfolio construction and investment is rising and changing as education and understanding regarding their use grows. However, ongoing concerns surrounding how ETFs can weather market volatility, signify a need and opportunity for further education efforts as well as potential structural improvements. So where do they go from here?

In 2019 BNY Mellon canvassed the views of 38 senior executives from the ETF community at the Inside ETFs conference in Florida. In it they asked ETF issuers what they saw as the greatest challenges for ETFs – with the majority choosing market volatility (62%) with regulations coming second (31%).9

Yet, research from BNY Mellon sister company Pershing shows that when advisors were asked if the vehicles behaved as expected during times of market stress, a strong majority agreed they had (88%). Pershing also reiterated that the number one reason investors select ETFs is their low fees (48%), followed by their relative tax efficiency (36%) and liquidity (28%).

Based on the survey results, the report concluded education regarding how ETFs work and the benefits they provide is resonating with investors.

ETF Assets by category 2010-2019

ETF Assets by Category

1 CNBC ETF assets rise to record $4 trillion and top industry expert says it’s still ‘early days’. November 11, 2019; CNBC January 24, 2020 Boom in exchange-traded funds continues

2 Statista as at October 22 2019

3 CNBC The SEC says it’s making ETFs more accessible – here’s what that could mean for investors. October 2, 2019

4 Barron’s. How the Best Advisors Use ETFs. May 6, 2019

5 Investopedia. The biggest ETF trends. November 19, 2019

6 As at February 18, 2020.

7 Money Marketing. Behind the numbers: the thematic ETF market in Europe. December 5, 2019

8 Money Marketing. Behind the numbers: the thematic ETF market in Europe. December 5, 2019


Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus, or a summary prospectus, if available, that contains this and other information about a fund, contact your financial advisor or visit Please read the prospectus carefully before investing.

ETF shares are listed on an exchange, and shares are generally purchased and sold in the secondary market at market price. At times, the market price may be at a premium or discount to the ETF's per share NAV. In addition, ETFs are subject to the risk that an active trading market for an ETF's shares may not develop or be maintained. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions.

ETFs trade like stocks, are subject to investment risk, including possible loss of principal. The risks of investing in the ETF typically reflect the risks associated with the types of instruments in which the ETF invests. Diversification cannot assure a profit or protect against loss.

Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. High yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis.

Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Small and midsized company stocks tend to be more volatile and less liquid than larger company stocks as these companies are less established and have more volatile earnings histories.

Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

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BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally. BNY Mellon ETF Investment Adviser, LLC is the investment adviser and BNY Mellon Securities Corporation is the distributor of the ETF funds, both are subsidiaries of BNY Mellon. Pershing LLC is a subsidiary of The Bank of New York Mellon Corporation.