Exchange-traded funds now represent 31% of trading volume in the U.S. equities market, an impressive indicator of the continued adoption of ETFs by a broad swath of investors. The $1.7 trillion in trading volume in August, and the $14.7 trillion in trading volume year-to-date, represent a calendar-year record for the industry, according to new data from the National Stock Exchange (NSX).

Michael Traynor, chief strategy officer for NSX, said the trading volume as a percentage of U.S. equities has been steadily growing for ETFs. It has been consistently in the mid-to-high 20s in terms of recent trading volume percentage, and now may have arrived at a permanent level of at least 30% of the U.S. equities market, Traynor said.

Source: National Stock Exchange*

"What is really interesting in these numbers is the fact that the average ETF is twice the share price of the average regular equity, so the investor dollars being traded in ETFs is a huge number," Traynor noted. What's more, the NSX data on trading volume does not take into account associated execution volume in the underlying securities. "None of that market-making activity is captured," he added.

Recent market conditions, continued product launches and continuing institutional adoption of ETFs are all part of what is behind the new trading volume plateau. "This was not a dramatic spike in light of consistent growth, but could represent a new benchmark for ETF trading volume," said Traynor.

Source: National Stock Exchange*

He added that while many skeptics may think these trading volumes are due to immense trading in a few products, like SPDRs and QQQ, skewing the entire industry, the fact is that stripping away that type of active trading, the growth of trading volume in other ETFs is even more impressive on a percentage basis.

Gary Gastineau, principal of ETF Consultants, said ETFs are by far the fastest-growing part of the equities market, and pointed out that one need look no further than yesterday's most active stocks list: Of the 12 most active stocks in the U.S., half were ETFs.

Source: National Stock Exchange*

Traynor pointed specifically to the success of ProShares' leveraged and inverse portfolios as an example of astonishing asset growth and trading volume increases. "Most people did not expect these kinds of funds to be heavily used by institutions, because institutions can get that leverage in other ways and more cheaply, but it has been the convenience of use tied to the availability of alternative asset classes," Traynor said.

Another important statistic that went up sharply—perhaps more sharply than some think is good—is the total number of funds. At the end of August, there were 819 ETF/ETN products, up 43% from the 573 products listed at the end of August 2007. While there is still room for innovative launches, the proliferation of product may portend an eventual "weeding out" period for the ETF space.

Source: National Stock Exchange*

Traynor said the sheer increase in number of funds does not show how small many of those funds are in assets. He added: "There are many funds that are probably not ‘long for the world.'"  

He said the overall number of funds should actually start to come down, while trading volumes continue to go up. "People have said for a long time that there are too many ETFs and too many bad ideas, and while there may be some truth to that, I think the contraction we will see is just the natural evolution of the industry," Traynor argued, adding, "that does not preclude opportunities for strong new entrants."

To that point, he said the success of a firm like ProShares with a trading-oriented approach, side by side with the success of Vanguard Group's ETFs, which have a huge foothold in the long-term investor market, illustrate the overall health and diversity of the ETF market. "In terms of pure application, there are more ways to use ETFs and that trend will continue," Traynor said.

The exchange-traded note market increased from 11 products a year ago to 92 at the end of August, an impressive jump, but one that Gastineau thinks may bump up against wider market problems.

"There is a limit to what people will want to wrap, and what banks will be able to issue in terms of ETNs. Remember you are basically buying a bank's credit, and lots of banks' credit ratings are a little lower now," Gastineau explained, adding that this market dynamic may create a natural ceiling in terms of the number of ETN products launched.

*This information is provided by National Stock Exchange and remains subject to all the disclaimers and terms of use as are set forth at nsx.com.