Research summary
ETF trends: Diversification grows amid rate uncertainty
August 14, 2024
The second quarter saw strong flows into both equity and fixed income exchange-traded funds (ETFs), with investors evaluating their next moves amid signs that Federal Reserve rate cuts may be drawing near.
These observations and more can be found in Vanguard ETF Industry Perspectives Q2 2024 [11-page PDF], our in-depth quarterly commentary featuring the latest ETF trends and insights. In each report, our investment experts help investors address issues that may affect their portfolios.
Key takeaways
Falling active ETF costs
The total costs of active ETF ownership are trending down as interest in active ETFs expands. For example, the average asset-weighted expense ratio for active ETFs has fallen from about 0.5% in 2019 to less than 0.4%.1 Additionally, the median bid-ask spread has drastically decreased, from 0.40% a decade ago to 0.18% at the end of the second quarter of 2024.2
Options use is on the rise
As the U.S. ETF market continues to grow, the use of options is increasing in multiple ways. One component is an increase in the options contracts traded on ETFs, with ETF options volume rising 265% over the past five years.3
Increased international equity emphasis in 2024
Allocation percentages to international equity ETFs have spiked in the first half of this year compared with the second half of 2023. U.S. investors may be growing concerned about home bias and the valuation of a U.S. stock market that has climbed almost 2.5 times as high as its COVID-19-era low in March 2020.4
Strengthening fixed income flows amid possible recalibration
Fixed income ETF inflows totaled $68.5 billion in the second quarter of 2024, with ultrashort ETFs representing the most popular asset class and intermediate categories also generating significant interest.5 This could be a sign that investors are recalibrating their duration preferences.
ETF Perspectives: Q2 2024
1 Morningstar, Inc., as of May 31, 2024.
2 Bloomberg, as of May 31, 2024.
3 Bloomberg and Morningstar, Inc., from January 2, 2019, through December 31, 2023.
4 Standard and Poor’s, from March 23, 2020, through August 9, 2024.
5 Morningstar, Inc., as of June 30, 2024.
Related links:
- Investor risk-taking, measured at midyear 2024 (article, issued August 2024)
- Our investment and economic outlook (article, issued July 2024)
- Rising markets and inflows lift ETF assets to a record high (article, issued June 2024)
Notes:
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
Options are a leveraged investment and are not suitable for every investor. Options involve risk, including the possibility that you could lose more money than you invest. Before buying or selling options, you must receive a copy of Characteristics and Risks of Standardized Options issued by OCC. A copy of this booklet is available at theocc.com. It may also be obtained from your broker, any exchange on which options are traded, or by contacting OCC at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 (888-678-4667 or 888-OPTIONS). The booklet contains information on options issued by OCC. It is intended for educational purposes. No statement in the booklet should be construed as a recommendation to buy or sell a security or to provide investment advice. For further assistance, please call The Options Industry Council (OIC) helpline at 888-OPTIONS or visit optionseducation.org for more information. The OIC can provide you with balanced options education and tools to assist you with your options questions and trading.
All investing is subject to risk, including possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Investments in bonds are subject to interest rate, credit, and inflation risk.
