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SIMON BROWN: I’m chatting now with Sean Kelly from Parity Wealth. Sean, I appreciate the early morning time. ETFs – I think they’ve been around since the ’90s in South Africa – arrived in late 2000. So they’ve been around for a long, long time and we really are seeing an evolution, in fact in some ways a revolution in terms of the global ETF space.
Talk us through some of the data points that have popped up recently on your radar.
SEAN KELLY: Good morning, Simon. Always good to be on. Yes, I think you’re absolutely right. The numbers certainly tell the story. The ETF space now manages close to US$17 trillion worldwide. In this year alone we have already seen the US topped up by another $800 billion. Markets are on track to reach $1 trillion by the end of the year for the second year running.
This is dominated by, of course, the big three passive names – BlackRock, Vanguard and State Street – which control around 70% of those global ETF assets, showing just how concentrated that industry has become. Their size is not just a US story anymore. In Europe inflows hit a record of around €39 billion this year and are expected to double by 2030.
We see similar trends in Asia Pacific.
But I think some of the crazy stats that we’ve seen come through are this product explosion. Twenty years ago there were only around 450 ETFs and for the first time there are now more listed US ETFs – over 4 600 – than there are US listed stocks at around 4 200. This year alone nearly 700 new ETFs have launched.
This explosion reflects both demand and competition and shows how crowded and complex the ETF universe has become. Navigating through these thousands of ETFs has become more complex and investors are increasingly seeking professional guidance to avoid new risks facing passive investing.
SIMON BROWN: Yes. That number is astounding. Maybe a decade ago I remember logging on to an offshore platform. There were 1 200 ETFs in the US and I thought that was a lot; 4 600 is crazy.
Does this does this create some risks – not in the sense that the industry is going to collapse, but some risks there? You mentioned investors needing assistance. I imagine at 4 600 there must be some wild and woolly [ones] and this must potentially generate some risks for the passive investing space.
SEAN KELLY: Yes, absolutely, Simon. It’s a paradox of choice here – innovation and mismatch with excess. Thematic ETFs are a multiplier and are often with ultra narrow or gimmicky themes like AI Pet Care. The confusions create a paradox of choice and more variety can lead investors to too much choice. This can overwhelm them, which is why professional guidance has become more important.
Back in 2009 the numbers showed that only 41% of investors were self-invested and at the end of 2024 this had fallen to around 25%.
But I think what’s really concerning market participants in the ETF space is that new data shows that passive ownership is now up to 35-40% of US market stocks, which is nearly double our earlier estimates. It’s certainly large enough to reshape how markets function and how that lazy capital, if you want to call it that, affects the market.
When an index rebalances, passive funds must buy or sell, regardless of fundamentals. Tesla’s inclusion in the S&P 500 in 2020 is a great example where billions floated overnight, lifting the price purely because it was a constituent of the S&P and had nothing really to do with the earnings.
I think market participants are concerned, especially [when] looking at the concentration risk, maybe looking at the Mag Seven, which is around 35% of the S&P, and Nvidia alone at around 8%.
But just on the on the other side, I’d like to point out that specifically on the Mag Seven space in the AI space, if you look at this Mag Seven, collectively they’ve acquired around 850 companies. [We see] subsidiaries like YouTube with an estimated market cap of around $550 billion and owned by Alphabet, or Instagram owned by Meta with a market cap of around $450 billion, each on its own ranking among the S&P 500 if spun out. So we’re probably looking at close to something like a Mag 70 in truth.
But anyway all of this matters because passive inflows are no longer neutral. They actively move markets and regulators are paying close attention, especially to the critically mismatched.
SIMON BROWN: I like the point there around maybe the Magnificent Seven. I hadn’t thought of that – of course Instagram in and of itself, WhatsApp and all of those.
A quick last question. Future ETFs –my sense is innovation versus excess; they’ve got to balance that line. At the moment maybe they’re skewing a little bit towards excess rather than proper innovation.
AI Pet Care – that just makes no sense.
SEAN KELLY: I think there’s an exciting future for this side of the market. I think tokenisation is also on the horizon, which gives fractional ownership of private real assets, and it could completely change how investors access alternative markets.
But the ETF story is reinforced by performance data. Over the past 15 years only a third of active US equity managers have beaten their benchmarks, with ETFs charging an average fee of around 0.09% versus the 0.64% of active fund managers. It’s perhaps no surprise that investors are defaulting to ETFs. So the challenge is clear – separate genuine innovation from noise.
That raises the big questions for investors. If most active fund managers underperform while ETFs are getting cheaper and broader, should we still be in active management at all? Or are we moving into a world where index investing is the prevailing strategy? Our view has always been and remains that there is room for growth in your portfolio.
SIMON BROWN: Yes, there’s always going to be room for both. If everyone just moved to passive, how would we set prices? I scratch my head. I agree – a blend, always.
We’ll leave that there. Sean Kelly, Parity Wealth, I appreciate the early morning.
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