Great Graphic: Flows into Exchange Traded Products

The Great Graphic was found on Big Picture View, which, in turn, it found on the Wall Street Journal's MarketBeat blog.  The chart documents what is a widely recognized fact--the rise of exchange trade products.  And this year is off to a record start on top of a record 2012.   

There are ETPs for nearly every conceivable investment , which of course does not mean that there won't be more.  At least three forces at work.  First is the securitization of financial products  which is the process of essentially turning things like bonds, commodities, currencies, and real estate into equities, as well as creating different equity baskets (funds) to cover industries, sectors, regions and themes.  

The second and related force, is the ebb and flow between exchange and over-the counter markets.  In the post-credit boom period, there is a shift from over-the-counter to exchange traded.  Part of this is driven by regulation, but part of it is also driven the exchange-model that addresses counter-party risk and transparency arguably better than the over-the-counter market.  Exchange traded products are also accessible to a wider range of people. For example, some funds are mandated to invest only in SEC regulated markets.  In this past, this denied the fund managers from investing in gold, or a foreign currency, for example. 

Third, exchange traded products may lend themselves to capturing certain economies or efficiencies.  An individual can buy US financial companies by buying one share of stock, for example.  A fund managers can quickly diversify into consumer staples by buying the sector ETP, or she can buy the belly of the US yield curve by buying another ETP.  While there are many moving parts, and this is definitely not meant to be tax advice, some investors may find tax benefits for buying an S&P ETF for example over an open-ended fund that tracks the S&P 500.  Other investors may be drawn to the transparency prices of an ETP.  

One of the key take-aways from the chart is that when trying to get one's hands around flows in and out of different financial products, like stocks and bonds, one needs to incorporate the exchange traded products to attain a holistic picture.