Last week we commented on a WSJ article implicating ETFs as the cause for increased correlation between individual securities in the S&P. Inspired by that article, we decided to do a little more research on the ETF market. Relative to mutual funds, ETFs still make up a small piece of the market. This Bloomberg chart shows what types of managed funds investors are using and what the 5-year return has been:

Mutual funds appear to have 83% of the market, compared to 5% for ETFs, about 1.5% for hedge funds and another 1.3% for funds of hedge funds. Of course, the hedge fund market size (and its performance) is difficult to estimate, so these numbers should be taken with a grain of salt. Other sources estimate it’s larger. But our primary focus here is on ETFs and mutual funds anyway.

The chart below showing the growth of the mutual fund and ETF industry since 1993 might put it into better perspective:

For ETFs, the data doesn’t start in 1998, it starts in 1993 with $464 million invested. The growth rate of ETFs has been higher, but it still has quite a way to go before it catches up with the big mutual funds.

One final chart that might be of interest to readers is the YoY growth of ETFs by type. For investors like us, optimistic that the growth of ETFs will lead to more market inefficiency, this is the important chart to take note of:

In some cases, these enormous growth rates are less meaningful than they appear because if the international bond ETF market grows from $1 billion to $2, it will still likely be a tiny fraction of the total market. But this should be a good roadmap for investors looking to see where ETFs are having an impact most (if they’re having any impact at all).