Global ETF Market Facts: three things to know from Q2 2023

1. Exchange traded funds (ETFs) remain a fraction of the total global financial market in both equities and fixed income, ranging from 4.2%-12.6% of equities and 0.4%-2.7% of fixed income assets by region.¹
2. Global ETF volumes decreased quarter-over-quarter alongside lower equity market volatility, but bid-ask spreads tightened over the period.²
3. Actively-managed ETFs represented 17% of all global ETF flows in the first half of 2023, the highest percentage on record, and market quality in these products has steadily improved. For example, average daily volumes have nearly doubled since 2020 and bid-ask spreads have moved more in-line with those of index-tracking ETFs.³

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

ETFs represent 12.6% of equity assets in the U.S., 8.0% in Europe, and 4.2% in Asia-Pacific. Market share is smaller in fixed income, where ETFs account for 2.7% 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 second quarter of 2023, average daily trading volumes for U.S. equities and U.S. ETFs were $495.4 billion and $141.6 billion, respectively. This means that U.S. ETFs accounted for over 28% of the total U.S. composite volume in the secondary market over the quarter.

The average daily trading volume in European equities was $103 billion, while the average daily trading volume in European ETFs was $9.2 billion. This means that secondary market trading in European-domiciled ETFs accounted for roughly 9% of total European cash equities over the quarter.

In Asia-Pacific, ETFs accounted for 12% of the total composite volume in the secondary market in the quarter, with Asia-Pacific equities and ETFs trading $153.6 billion and $18.8 billion, respectively (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 second quarter of 2023, the ratio of secondary market activity to primary market activity in the U.S. was 9:1. This means that for every $9 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 4:1 (Figures 7, 8, and 9).

In the second quarter of 2023, the average daily trading volume in U.S. iShares ETFs was $33.2 billion, down from an average of $39.6 billion in Q1 2023.

In Europe, the average daily trading volume in iShares ETFs was $4.2 billion, down from an average of $4.9 billion in Q1 2023.

In Asia-Pacific, the average daily trading volume in iShares ETFs was $0.13 billion, in line with the Q1 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 Q2, bid-ask spreads in U.S. iShares ETFs tightened to 12.2 basis points (bps), on average. In European-listed iShares ETFs, spreads tightened to 13 bps on average, and in Asia-Pacific-listed iShares ETFs, spreads tightened to 17.7 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 June 2021 through June 2023, approximately 5.3% 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).

• While actively-managed (“active”) ETFs are still a small portion of the total ETF market at 5.3% of total assets, they have been an increasingly popular tool for investors. Active ETFs saw inflows of over $60 billion in the first half of 2023, up over 160% since 2019.²³
• The market quality of active ETFs has also improved. Since 2020, average daily trading volumes have nearly doubled while bid-ask spreads have tightened by over 20%.²⁴
• While active ETFs are not available in every region (the majority are listed in the U.S. and Europe), recent regulatory developments may create opportunities for active ETF listings in additional countries.

While the first U.S.-listed active ETF was launched in 2008, adoption of these products remained limited until the passage of the SEC’s Rule 6c-11 or “ETF Rule” in late 2019, which streamlined processes and added flexibility for issuers to launch and manage active ETFs.²⁵ Since 2020, U.S.-listed active ETFs have accounted for over 63% of U.S. ETF launches, a noticeable increase from 41% in 2019 (Figure 15).

A decrease in management fees has also contributed to the adoption of active ETFs in the U.S. The asset-weighted expense ratio of U.S.-listed active ETFs declined from nearly 50 bps in 2020 to under 40 bps by the end of 2022.²⁷

As the number active ETFs has expanded, so too have their assets under management and flows. In 2019, global active ETF AUM was $143 billion (2.4% of global ETF AUM). By the first half of 2023, assets increased to $529 billion (over 5.3% of global ETF AUM).

Global active ETF flows have also significantly increased, growing from $20 billion in 2019 to over $60 billion in the first half of 2023 alone (a record for active ETF flows as a percentage of total ETF flows (Figure 16).

Historically, the market quality of active ETFs has been lower than that of index-based ETFs as many of these products were newly launched in the last four years, and have therefore generally had less AUM and lower liquidity.

Active ETFs, by design, often have higher turnover than index-based ETFs, which can make it more challenging for market makers to provide liquidity for these products and can result in higher bid-ask spreads. However, as this segment of the market matures and more liquidity providers and authorized participants supports these products their market quality is steadily improving.

In the first half of 2023, the average daily trading volume in global active ETFs was $7.3 billion, slightly down from 2022, but still nearly a 100% increase from 2020 (Figure 17).

Bid-ask spreads for global active ETFs in the first half of 2023 were 28.7 bps on average, tighter than 2022 and only 1.4 bps higher than those of index ETFs, on average (Figure 18).

Active ETFs face a unique global regulatory landscape. While many markets and regions, such as the U.S. and Europe, have allowed active ETF listings for over a decade, active ETFs are not available in every market. For instance, in Asia-Pacific, Australia, China, Hong Kong, and South Korea are the first countries to currently offer active ETFs.

However, given the growth and increased use of these products globally, the regulatory landscape is evolving. In 2022, the Tokyo Stock Exchange announced that it would be modifying a rule that only permits the listing of index-tracking ETFs to allow active ETFs with daily transparency to become listed in the second half of 2023. The Singapore Stock Exchange recently conducted a similar consultation on the listing of active ETFs with a conclusion expected later this year.