Why some ETFs stand the test of time

In the dynamic world of exchange-traded funds (ETFs), a group has carved out a legacy of capturing the attention of investors for decades. Even casual investors may be familiar with some of the most popular ETFs by their tickers alone.

How have a handful of ETFs stood the test of time? We’ll take a look at the characteristics of an ETF that can endear itself to investors, whether it’s tracking a well-known index or being very liquid.

Achieving critical mass

There’s no other way to say it: in ETFs, size matters. History has shown that the first-mover advantage exists in ETFs, for several reasons.

For an ETF to even survive, it has to reach a critical mass of assets to cover its expenses.

That’s just the first step, though. Once an investor or financial professional has decided to invest in an asset class, they may start their research with a list of the largest ETFs by assets. This can turn into a self-fulfilling prophecy because the big tend to get even bigger.

It’s probably not a coincidence that the oldest U.S.-listed ETF is also the largest. SPDR® S&P 500® ETF Trust (SPY) launched on January 22, 1993 and has just over $535 billion in assets.¹ For perspective, Invesco QQQ ETF listed in 1999 and currently has about $252 billion in assets.²

Benchmark brand power

When it comes to passively managed ETFs that follow indexes, having a well-known and trusted benchmark can be a huge differentiator. Again, using the examples of SPY and QQQ, tracking the S&P 500 Index and Nasdaq-100 Index, respectively, can be an advantage. These are the indices that investors use to follow the market and compare the performance of actively managed strategies. For example, the S&P 500 has over $11 trillion indexed or benchmarked to it.³ The Nasdaq-100 has been around since 1985 and is known as the home of some of the world’s most innovative companies.

Trading volume and liquidity

Similar to an ETF’s size, trading volume and liquidity are often a case of the rich getting richer. What this means is that investors and traders tend to gravitate to the most highly traded ETFs, which begets even more activity.

ETFs with a lot of assets and trading volume can enjoy a halo effect. Among other things, it could tell investors they don’t really have to worry about the ETF closing or having wide bid/ask spreads.

Similar to individual stocks, ETFs with a lot of trading volume like QQQ are considered to be liquid. Yet there’s more to the liquidity story when it comes to ETFs. In addition to the ETF’s trading volume, the liquidity of the underlying asset class it invests in also matters.

Performance

At the end of the day, investors want performance. Although chasing performance is a well-known investor mistake, some of the oldest ETFs have respectable long-term track records.

In the case of QQQ, if you’d invested $10,000 twenty years ago, your money would be worth $131,162 as of December 31, 2023.⁴

Even though QQQ has outperformed the S&P 500 over the past 20 years, QQQ has been more volatile as measured by standard deviation.^5,6 It’s a good reminder that there’s no free lunch in investing and that attractive long-term returns can often require enduring short-term volatility.

Standardized performance – Fund performance shown at NAV. Performance data quoted represents past performance, which is not a guarantee of future results; current performance may be higher or lower than performance quoted. Investment returns, and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. An investor cannot invest directly in an index. Index returns do not represent Fund returns. Invesco QQQ's total expense ratio is 0.20%.

It also may be a good idea not to let performance distract investors from the importance of portfolio construction. For example, bond ETFs typically underperform their stock counterparts over long periods, but fixed-income ETFs can play a critical role in portfolios by generating yield and diversification.⁷

Finally, when it comes to performance, passive ETFs are doing their job if they closely replicate the performance of their indices. Actively managed and smart beta ETFs, meanwhile, may aim to outperform benchmarks or deliver lower volatility.

Building a competitive moat

The ETF business is known for being extremely competitive, and that’s a good thing for investors.

Much like individual companies, ETFs can benefit from competitive moats. In addition to the factors listed above, other competitive advantages can include the asset manager’s brand and expertise, and how unique or helpful the strategy is for investors.

Key takeaways

• ETFs have been around in the U.S. since 1993 and some of the earliest funds have grown very large by providing efficient exposure to different asset classes.
• Some of the oldest ETFs have stood the test of time by providing liquidity, exposure to well-known benchmarks, or possessing other key competitive advantages.
• Even ETFs that are small today can grow large by delivering strategies that serve an important investor need such as providing income, potentially limiting volatility, or providing exposure to difficult-to-access themes or sectors.