What Makes an ETF Successful?

Exchange-traded funds have exploded in popularity, with the industry now reaching the milestone of $10 trillion in assets.

Aniket Ullal, head of ETF research and analytics at CFRA Research, recently examined the ETFs launched over the 10-year period ending June 30, 2024, to identify trends among the successes. Ullal did not look at the funds’ returns, so “success” here is defined in terms of gathering enough assets to survive and, for many, thrive — which is, after all, ultimately what determines the selection available to investors.

He found that of the 3,426 ETFs launched (not including mutual fund conversions), only 38% were viable, meaning they remained listed and exceeded $100 million in peak assets. Some 10% of the listings crossed the $1 billion mark in assets at some point over the decade. Among his other observations:

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Pioneers are rewarded. Among the most successful launches of the decade (again, in terms of assets) were iShares Bitcoin Trust (IBIT) and JPMorgan Equity Premium Income ETF (JEPI).

Though not the first entrants in their nascent categories, they had cost advantages and well-heeled sponsors.

The JPMorgan fund, which uses a covered-call options strategy that invests in high-quality stocks and then sells options against those holdings to boost income, has garnered $36 billion in assets (as of October 31) since its May 2020 launch, making it the most popular ETF of the decade.

The path to $1 billion varies. The Bitcoin Trust ETF reached $1 billion in just seven days; Pacer U.S. Cash Cows 100 (COWZ), which targets companies with high free cash flow, took almost five years to reach $1 billion.

Tapping into the zeitgeist works… JPMorgan Ultra-Short Income (JPST) and iShares 0-3 Month Treasury Bond (SGOV) prospered when investors sought funds that are less sensitive to interest rate moves after the Federal Reserve began an aggressive rate-hiking cycle. Invesco NASDAQ 100 ETF (QQQM), a more recent version of the parent fund (QQQ), grew as investors looked for a proxy for the Magnificent Seven stocks.

…Until it doesn’t. Ark Innovation (ARKK) rode the wave of ultra-high-growth stocks in 2020 and 2021 until it became the largest actively managed ETF at the time, reaching peak assets of $28.2 billion. A subsequent correction in Tesla and other highfliers, however, led to a significant decline in Innovation’s assets, which stood at just $5.4 billion recently.

Bonds have beaten stocks. Bond ETF launches have been more successful over the decade, with 50% reaching the $100 million viability threshold, compared with 36% for stock-focused ETFs. Success rates for commodity and alternative ETFs were much lower.

Looking ahead, Ullal says managers are increasingly launching more complex products, such as defined-outcome ETFs, which offer investors protection from losses in exchange for capping potential gains; actively managed stock funds; and ETFs tied to specific themes. “I’m always amazed by how people come up with new ideas,” he says.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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