The iShares Core S&P 500 Ucits ETF now has $20.8bn (€19.5bn) in assets under management, after seeing total net inflows of €1.5bn in the three months to the end of January. According to Morningstar data, the ETF, launched in 2012, now has a market share of about 25% among US equity ETFs listed in Europe. The ETF is not only the biggest, it is also one of the cheapest available to European investors, with an ongoing management charge of only 0.07%.
iShares has another ETF (the S&P 500 (Ucits) ETF) that tracks exactly the same basket of stocks but has a management charge of 0.40%. Interestingly, this fund still holds more than $8bn in assets, although it has seen continuous monthly net outflows since August 2015. Clearly, there are still a lot of investors out there for whom fees don’t matter that much.
The iShares Core S&P 500 Ucits ETF may be the biggest in its kind listed in Europe, its US cousin is fast approaching the $100bn mark in assets under management. This prompts the question whether there actually is a size limit to ETFs. The world’s largest ETF, the SPDR S&P 500 ETF, is more than twice as big as Blackrock’s biggest one, suggesting there is room for more inflows.
Blackrock’s assertion in response to questions by Expert Investor that ETFs have no capacity constraints whatsoever, unlike actively managed funds, seems a bit crude though.
US equities are the most liquid market in the world and the S&P 500 index has a total market cap in excess of $20trn. “But bulky ETFs in smaller, less liquid markets may face problems when liquidity dries up,” says Rishma Moennasing, a fund analyst at Rabobank in the Netherlands. “We did look into this a few years ago and didn’t immediately see any problems then, but ETFs have grown in size considerably since. So it’s probably worth another look,” she adds.
The high-yield bond market is the most obvious area of possible strain. iShares’ largest high-yield bond ETF has assets in excess of $18bn, meaning it owns about 1% of the total USD high yield bond market, which is a lot less liquid than the US equity market. Questions have been raised about how high—yield bond ETFs, which are a lot larger than actively managed funds, will deal with mass redemptions in times of severe market stress.