Published - May 29th, 2023 @ 10:37 AM (GMT+2 )

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ETFs hit a record 30.7% of US stock market turnover in 2022

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In 2022, the influence of Exchange-Traded Funds (ETFs) on the US stock market made a significant leap, contributing to a record-breaking 30.7% of market turnover. This figure represents a considerable increase of more than a fifth from the 25.3% share in 2021, sparking fresh debates regarding the seemingly inexorable rise of ETFs.

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The latest report by the Investment Company Institute (ICI), a leading US trade body, brought this data to light, underscoring the growing tendency for market participants to employ ETFs as tools for swift shifts in market exposure.

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Shelly Antoniewicz, ICI's senior director of industry and financial analysis, traced the enhanced turnover share of ETFs back to the heightened market volatility experienced in 2022. She pointed out that during times of financial turbulence, ETF trading volumes, particularly from institutional investors, surge as they seek an efficient means of risk transference and hedging.

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However, other factors, such as the advent of daily option expirations on the S&P 500 index in 2022, could have boosted ETF trading volumes, according to Rabih Moussawi, associate professor of finance at Villanova School of Business. He suggested that these developments increased the trading of zero-day-to-expiration options and the utilization of ETFs by options market makers to hedge their positions.
Moussawi also highlighted that this trading activity might have amplified ETFs' impact on market volatility. He was supported by Valentin Haddad, co-author of a 2022 academic paper, who suggested that the departure from ETFs' traditional role as long-term portfolio constituents reflected the evolving behavior of investors.

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ETF trading volumes hit a record $44.1tn in 2022 despite a contracting market value

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The ICI data indicated a 22.5% surge in US ETF trading volumes, reaching an unprecedented $44.1tn. Despite several years of consistent share of turnover around 25-27%, ETFs broke this mold in 2022. Even as market value contracted at the end of 2022, falling from $7.2tn to $6.5tn, US-listed ETFs had increased seven-fold from $992bn in 2010.

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Remarkably, in 2022, investors committed a net $609bn into US-listed ETFs, while a record-breaking $1.1tn was withdrawn from US-based mutual funds.
ETFs have sustained their influence into 2023, accounting for around 30% of trading volumes during its early months. Antoniewicz stated this was due to sustained high market volatility.

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While ETFs' secondary market activity constituted 86% of trading in 2022, their primary market activity accounted for the remaining 14%, equating to $5.2tn or 5.2% of the $99.8tn traded in stocks in 2022. ICI has suggested that this low percentage means the impact of domestic equity ETF trading on underlying equities is negligible.

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As of Q1 2023, 94% of US ETFs were passively managed

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Interestingly, at the end of Q1 2023, passively managed funds comprised 94% of US ETFs, which Antoniewicz suggests is a diverse range of securities, asset classes, and tactical investment positions. Bryan Armour, director of passive strategies research, North America at Morningstar, also downplayed concerns about the growing dominance of ETFs.
He proposed that ETFs' rising prominence is logical as they offer a vehicle for price discovery and rapid adjustments in beta exposures. Armour anticipates this trend will persist as ETFs continue to eclipse mutual funds.

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