Time and again, news articles emerge about the growth of ETFs that indicate investors are embracing low-cost, index-based passive investing. However, the popular perspective may not be the perspective with the most prudent consideration.
The ETF investment structure itself delivers many great features, and advisors and investors alike have undoubtedly embraced and gravitated toward the freedom and flexibility ETFs provide. Not too long ago, clients could only invest in mutual funds, which limited the number of exchanges and redemptions that an investor could make in a single year. Additionally, mutual funds charged high fees for what their sponsors deemed a "short-term" redemption.
Based on assets under management alone, ETFs are a success story; first with institutional investors, then with self-directed investors and financial advisors. Perhaps one of the more interesting aspects of this story is that some of the largest ETFs have displaced some of the largest stocks as the highest volume-traded securities on a stock exchange. Taking a closer look at recent data on the top 10 index ETFs, the total value of that ETF range shows turnover in trading anywhere from 10 days to 241 days (see table below). The top 10 ETFs by AUM — which represent one-third of all the AUM within the ETF space — on average experience turnover every 23 ½ days.
