ETFs can be effective tools for long-term investors interested in gaining access to the entire market or parts of it, or in using them for tactical asset allocation strategies. Another major attraction is that ETFs trade on an exchange, which allows investors easy access to best-in-class indexing, purchased and sold through a brokerage account. Traditional mutual funds must be purchased from a fund provider or through a mutual fund supermarket. ETFs are also very popular with institutional investors and traders focused on shorter-term exposures.

Here we examine the dollars traded in the ETF marketplace, focusing on the highest dollar-traded ETFs. We find, perhaps not surprisingly, that trading volume has in large part been driven by a narrow selection of ETFs.

In Figure 1 we look at the overall increase in the volume, in dollars traded, for ETFs as a percentage of all equity trades from February 2004 through June 2009. Over this period, monthly trading volume for stocks increased from $2.0 trillion to $8.0 trillion in October 2008, and was above $4.7 trillion in June 2009. During the same time period, ETF trading volume increased at a much faster rate, jumping from $142 billion in early 2004 to $3 trillion in October 2008, and was around $1.4 trillion in June 2009. This significant growth has made ETFs roughly 30% of all equity trading volume, in terms of dollars traded, a much larger portion than the 7% they represented in 2004. The increase in volume coincided with a significant expansion in ETF offerings, which grew from 151 U.S.-listed ETFs in early 2004 to almost 850 by the end of June 2009, and their increased acceptance and popularity.¹

Figure 1. ETF Trading Volume

Note: Stocks are represented by both listed and over-the-counter trading volume.

Sources: NYSE Arca (www.arcavision.com) and Morningstar

We investigated further to see what has driven the growth in ETF trading volume more recently, focusing on the period since January 2008. While the growth in ETF trading volume has coincided with the growth in the sheer number of ETF offerings, the top 20 most heavily traded ETFs by dollar volume, on average, accounted for almost 80% of all ETF trading. It is apparent that market participants have focused on a few ETFs, despite having many available options. In Figure 2, we provide a breakdown of the average daily trading volumes, which highlights the role of the 20 highest-volume ETFs in overall trading volume.

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