Morningstar Magazine - June/July 2017 - 33

EXHIBIT 2

EXHIBIT 3

Active Use of Passive More mutual
funds are using ETFs, and their ETF
positions are growing.

Clues ETFs such as SPY have high turnover rates, an indication that they are being
used in an active fashion.

Median Size of ETF
# of Mutual Funds
Holding ETFs Holdings (% of AUM)

Average Holding Periods of the 10 Largest ETFs

Average AUM
($Bil)

Average Holding Period
(Days)

204.40

15.4

2006

595

1.2

SPDR S&P 500 ETF SPY

2007

711

1.3

iShares Core S&P 500 IVV

82.58

149.6

2008

964

1.5

Vanguard Total Stock Market ETF VTI

65.94

354.2

2009

785

1.3

iShares MSCI EAFE EFA

59.80

70.3

2010

850

1.7

Vanguard S&P 500 ETF VOO

52.44

172.9

2011

862

2.3

Vanguard FTSE Emerging Markets ETF VWO

42.26

111.7

2012

1,045

2.0

iShares Core US Aggregate Bond AGG

40.19

187.4

2013

1,110

3.0

PowerShares QQQ ETF QQQ

39.86

22.3

2014

1,216

3.2

Vanguard FTSE Developed Markets ETF VEA

37.31

185.7

2015

1,234

4.3

SPDR Gold Shares GLD

35.98

43.7

2016

1,222

4.5

Source: Morningstar. Data as of 04/30/2017.

Source: Morningstar.

series' share of the target-date market increased
from 17% as of 10 years ago. ETF managed
portfolios are investment strategies that typically
have more than 50% of portfolio assets invested in
ETFs. Primarily available as separate accounts
in the United States, these portfolios represent
one of the fastest-growing segments of the
managed-accounts universe. As of Dec. 31,
Morningstar was tracking 881 strategies from 162
firms with total assets of $84.8 billion in this
space. This is just the tip of the iceberg, as there
are tens of billions of dollars invested in similar
strategies that are managed by teams at a number
of different intermediary platforms, which are
not captured in our database. Lastly, there are the
robo-advisors. Firms like Vanguard and Charles
Schwab SCHW have seen rapid growth in the
adoption of their digital-advice platforms. Schwab
Intelligent Portfolios were home to $16 billion in
investors' assets as of the end of March.
Vanguard's Personal Advisor Services segment
now oversees more than $50 billion.

As individuals and advisors show a growing
preference for solutions over products and grow
more comfortable with technology, it is likely that
these active asset allocators will continue to
attract new money from investors.
Actively managed mutual funds are also making
greater use of passive funds, and ETFs in particular
( E X H I BIT 2 ). Since 2006, the number of actively
managed U.S.-domiciled mutual funds that
hold at least one ETF has more than doubled.
Meanwhile, the size of the median ETF positions
held by these funds has nearly quadrupled.
Security selectors are using ETFs to fill gaps in their
portfolios. Some have substituted them for
futures contracts to equitize cash. Others invest in
them to take sector bets when they don't have
expertise to select the most attractively priced
stocks in a corner of the market. The growing use
of ETFs by active fund managers is a clear
example of the increasingly fuzzy distinction
between active and passive.

The starkest data demonstrating the active use
of passive building blocks is the rate of turnover in
many ETFs' shares. SPDR S&P 500 ETF SPY is the
most actively traded security on the planet.
According to NYSE, SPY's average daily turnover in
March was $21.4 billion. Over the year ending April
30, the average holding period for SPY was
15.4 days.3 That hardly seems passive. ETFs are
being used in countless ways by countless
different market participants. For some, they are
low-cost, tax-efficient, buy, hold, and rebalance
building blocks. For others, they are a substitute
for a derivative, a trading tool, or a hedge.
Unlike mutual funds, there is no way to trace ETF
users or to discern how they are being used. Trying
to do so is like a playing a frustrating game of Clue.
All we know for certain is that the candlestick
was the murder weapon (SPY, in our case). We
have no idea who committed the crime, why they
did it, nor in what dark corner of the mansion
the deed was done. What we can say for certain is
that ETFs are being used actively (EXHIBIT 3 ).

3 I calculated ETFs' average holding periods as follows: Average Holding Period = 365 / (Total Dollar Value of Trades Over Last 12 Months / Average Daily Assets Under Management).

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