Players Bet Big on ETFs

Is the future of the market exchangeable?


Exchange-traded funds are the fast growing investment vehicles in the world currently. To financial institutions it’s a goldmine. There are increased trades, more money to be managed, and more advisors of work. There was a big shake up from CBOE Holdings looking to take a share in that big pie by buying Bats Global Markets for $3.2 billion. Bats was another attempt by exchanges flexing their muscles to grab the ETF market. CBOE is a big exchange with the largest U.S. options exchange and pushing a volume of over 1 billion contracts a year…with a b. CBOE has moved above $5 billion to compete with perhaps the most important player the Intercontinental Exchange. Bats and NASDAQ together accounted for 43% of the trading volume. There are other ways CBOE can make money on this through pricing and licensing to other financial products as well. Anyone that is dominating any sort of market share on ETFs are making good money, and most of all JPMorgan. The company has moved tens of billions in marketing cap to above $230 billion where it is at today for being one of the largest providers of ETFs, along with Blackrock.

ETFs are being adopted by portfolio managers worldwide and has recently drawn criticism as well. There are broad macro and sector wide added volatility because of the wide range of investments an ETF can contain. This may exacerbate a market sell-off and result in another flash crash. Besides few drawbacks ETFs are more low cost than mutual funds and come in so many forms. They also appeal to millennials since some newer ones cover emerging industries such as the cybersecurity ETF – HACK. What’s more important as well is that ETFs can be traded live as compared to mutual funds which is at the close. This means equity traders, people playing options, and buyers to trade much more frequently accounting for a much higher volume. One perceived threat to exchanges is the lack of interest in European ETFs. Compared to American ones which have seen twice the growth in about seven years, European ones have stayed mostly flat. Some are saying it is because of broader Europe issues and regulatory policies. Despite this the net assets of ETFs have risen from 1 trillion to over $2.3 trillion since 2010. There has especially been a boom in bond ETFs which account for close to half a trillion of that total. Previously bonds could only be bought by retail investors through a mutual fund which likely had a high annual fee. Right now the only bump in the road is a possible hike increase by the Fed.