Global ETF Market Facts: three things to know from Q3 2023

1. Exchange traded funds (ETFs) remain a fraction of the total global financial market in both equities and fixed income, ranging from 4.4%-12.7% of equities and 0.4%-2.6% of fixed income assets by region.¹
2. Global ETF volumes, with the exception of an increase in Asia-Pacific, were roughly in line quarter-over-quarter as a result of continued lower equity market volatility and remain lower year-over-year, while ETF bid-ask spreads continued to tighten in both the U.S. and Europe over the period.²
3. U.S. ETF options volumes have grown at a compounded annual growth rate of 53% since 2019 (reaching nearly $100 trillion year-to-date); ETFs with a robust options ecosystem are typically supported by higher average daily volumes and lower bid-ask spreads.³

Assets under management in ETFs are only a fraction of the global financial market.

ETFs represent 12.7% of equity assets in the U.S., 8.5% in Europe, and 4.4% in Asia-Pacific. Market share is smaller in fixed income, where ETFs account for 2.6% of fixed income assets in the U.S., 1.8% in Europe, and 0.4% in Asia-Pacific (Figures 1, 2, and 3).

In the third quarter of 2023, average daily trading volumes for U.S. equity market (shares, ETFs, and depository receipts) and U.S. ETFs were $499.6 billion and $141.3 billion, respectively. This means that U.S. ETFs accounted for 28.2% of the total U.S. composite volume in the secondary market over the quarter, slightly lower than Q2 figure.

In Europe, there was an uptick in this percentage. Average daily trading volume in European equities was $89.5 billion, while the average daily trading volume in European ETFs was $8.5 billion, roughly 9.6% of total European equities over the quarter. This was as a result of a decline in European equity volumes in Q3.

In Asia-Pacific, ETFs accounted for 15.2% of the total composite volume in the secondary market in the quarter, with Asia-Pacific equities and ETFs trading $132.9 billion and $20.2 billion, respectively. This was a substantial increase from Q2 led by a pickup in levered and inverse ETP trading as well as a significant decline in Asia-Pacific equity volumes (Figures 4, 5, and 6).

Most ETF trading activity occurs in the secondary market, where ETF shares change hands between buyers and sellers. When demand cannot be met in the secondary market, large institutions (known as “authorized participants”) can transact with ETF issuers to create or redeem ETF shares in a separate, “primary” market.

In the third quarter of 2023, the ratio of secondary market activity to primary market activity in the U.S. was 8:1. This means that for every $8 of ETFs traded, only $1 resulted in trading activity in the underlying securities. In Europe, this ratio was 2:1 and in Asia-Pacific it was 5:1 (Figures 7, 8, and 9).

In the third quarter of 2023, the average daily trading volume in U.S. iShares ETFs was $33.8 billion, slightly up from an average of $33.2 billion in Q2 2023.

In Europe, the average daily trading volume in iShares ETFs was $3.9 billion, down from an average of $4.2 billion in Q2 2023.

In Asia-Pacific, the average daily trading volume in iShares ETFs was $0.13 billion, in line with the Q2 2023 average (Figure 10).

Bid-ask spreads (a component of trading costs for investors), are impacted by factors such as liquidity, volatility, and the efficiency of the ETF ecosystem.

In Q3, bid-ask spreads in U.S. iShares ETFs tightened to 11.8 basis points (bps), on average. In European-listed iShares ETFs, spreads tightened to 12.4 bps on average, and in Asia-Pacific-listed iShares ETFs, spreads widened to 18.8 bps on average (Figure 11).

Investors can assess the impact of primary market activity on the prices of underlying stocks through a metric called “imputed flow.” This metric estimates the proportion of all stock trading that results from ETF creations or redemptions; meaning, imputed flow is an approximation for how much stock trading is generated by ETF inflows and outflows.

The impact is typically modest. From September 2021 through September 2023, approximately 5.2% of trading volume in U.S. equities has been attributable to ETF activity, while in Europe, just 1.9% of trading in individual European stocks has been attributable to ETF flows. In Asia-Pacific, this figure is 1.3% (Figures 12, 13, and 14).

• ETF options are an increasingly popular tool for both institutional and individual investors to express tactical market views, seek income, and hedge portfolios.
• ETF options volumes have significantly increased since 2019, and ETFs with a robust options ecosystem are typically supported by higher average ADVs and lower bid-ask spreads.²³

ETF options are commonly used by both institutional and individual investors for a variety of purposes which may include to:

• Express tactical market views through leveraged exposure to a specific segment of the market.
• Seek income by receiving options premium income from certain options-based strategies, like buy-writes.²⁴
• Hedge portfolios and manage market risk.

ETF options are listed on multiple exchanges across regions, including in the U.S., Europe, and most recently, Asia. There are over 1,600 unique ETF options listed on over 5 different exchanges.²⁵

In the U.S., ETF option volumes have grown at a compounded annual growth rate of 53% since 2019, and year-to-date 2023 figures are on track to become the highest on record (Figure 15).

ETF options can give investors choice by providing them with another way to express their views; they can also contribute to an improved ETF trading experience.

ETFs with a robust options ecosystem are typically supported by higher average daily volumes and lower bid-ask spreads as a result of hedging activity using the ETF.²⁷

As the ETF options landscape expands, liquidity and cost benefits for investors are likely to continue to accrue to the ETFs with the largest options markets.

For example, in the U.S., ETFs with the most liquid options markets had an average bid-ask spread of 4.1 bps versus the rest of industry average of 25.3 bps in Q3 (Figure 16).

At the same time, U.S. ETFs with the most liquid options market had over $130 billion more in Q3 ADV than the rest of industry average (Figure 17). This can make these ETFs more liquid and cost-efficient to trade for end investors.