Visualizing the Robustness of the US Equity ETF Market

Articles From: Alpha Architect
Website: Alpha Architect


PhD CEO, Alpha Architect

The post “Visualizing the Robustness of the US Equity ETF Market” first appeared on Alpha Architect Blog.

Market commentators sometimes suggest that the equity ETF market is just a bunch of “index funds” that all do essentially the same thing: deliver undifferentiated stock market exposure.

How true is that statement? Fortunately, we can test the hypothesis that the ETF market is roughly a few thousand different ways to capture the same basic risk/returns. To do so, we leverage our Portfolio Architect tool to quantify the active share of all US equity ETFs against the S&P 500 index (the king of indexes).

Active share is the percentage of a portfolio’s stock holdings that differ from its benchmark index (in this case, the S&P 500). The measure is based on the weightings of securities in a portfolio compared with those of its benchmark and can be used as a measure of the degree of a portfolio’s active management. An active share of 0, would imply there is a 0% difference between a given ETF and the SP500. An active share of 100 would imply there is a 100% difference in holdings/weights between a given ETF and the SP500. And then you have everything in between.

As a general rule of thumb, we consider any strategy with an active share of less than 30% to be a ‘closet index’, which refers to a strategy that is effectively the same as the underlying index it seeks to track.

Here is the distribution of active shares across the 1814 US Exchange Traded Equity ETFs we track in our database against SPY (what we use as the SP500 holdings benchmark).

Source: Portfolio Architect

Key Points:

  • A bit over 4% of all funds are S&P 500 closet-trackers. That’s a lot of clones — no doubt!
  • Nearly 60% of all funds have nothing to do with the S&P 500.
  • There is a lot of differentiation in the ETF market. And that’s healthy!

More Charts

Here we look at US Exchange Traded ETFs that only traffic in US stocks.

The left axis is the % of the universe and the right access is the sum of the AUM allocated to a given active share bucket.

Source: Alpha Architect and Factset

We do the same thing but with expense ratios:

Source: Alpha Architect and Factset

Disclosure: Alpha Architect

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Alpha Architect and is being posted with its permission. The views expressed in this material are solely those of the author and/or Alpha Architect and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.