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U.S. ETFs: Demand and Institutions Together Create Prosperity

  During the 2008 financial crisis, Warren Buffett, a stock god, and a Wall Street fund manager made a ten-year bet, that is, the two sides chose the investment targets respectively, and saw which option would yield higher returns ten years later. The fund manager chose 5 hedges at that time. Fund, and Buffett chose only one S&P 500 ETF; ten years later, the answer was revealed, the 10-year average return of the five funds selected by the fund manager was only 2.96%, while Buffett’s S&P 500 ETF annualized return of 2.96% 8.5%.
  The underlying logic of Buffett’s victory is that any index is not as simple as it looks on the surface. It is a stock picker in itself, and it can be updated continuously. The constituent stocks are all high-quality listed companies.
  An exchange-traded fund (ETF) is an open-end fund that is listed and traded on an exchange and whose fund shares are constantly changing. It combines the operational characteristics of closed-end funds and open-end funds. Investors can either subscribe or redeem from fund management companies. Fund shares can also be freely bought and sold on the secondary market of the exchange.
  The difference between ETFs and mutual funds is that mutual funds cannot be traded in the secondary market, and can only be subscribed and redeemed through various underwriting channels; mutual funds are priced using the “unknown method”, and their subscription and redemption prices are equal to the following The net value of the shares when the NAV is calculated, and the ETF trading price is determined by the supply and demand in the secondary market; ETFs can be used for strategies such as short selling, stop loss, limit orders, and margin purchases; ETFs simply replicate the constituent stocks of the tracked index , more transparent; ETFs are traded without paying capital gains tax.
  The United States has the most mature ETF market in the world. As of the end of 2021, there will be 234 issuers in the US ETF market, 2,805 products, and a market size of US$7.21 trillion, a year-on-year increase of 31.9%, accounting for 70.2% of the global market; currently, The issuance of most ETF products still requires the approval of the U.S. Securities and Exchange Commission (SEC). 98% of ETF products need to be registered under the Investment Company Act of 1940 and are subject to SEC supervision. Another 2% of products invest in commodities, ETFs of currency and futures contracts need to be registered in accordance with the Commodity Exchange Act and the Securities Act of 1933 and are subject to dual supervision by the Commodity Futures Trading Commission (CFTC) and the SEC, but the trend towards full registration has become more and more obvious. In the United States, many market participants will provide buyers and sellers quotations for ETF products on the secondary market, which ensures the liquidity of ETF products.
  The driving force behind the vigorous development of the ETF market in the United States includes several aspects, such as the investment needs of high-net-worth wealthy people, the rising stock market has increased the net asset value of ETFs to attract incremental capital inflows, and active investment is difficult to outperform due to high market transparency. The underlying ETF, etc.
  Investors in U.S. equity ETFs are dominated by institutions and supplemented by individuals, with the ratio of the two holdings about 6:4. High net worth individuals are the main individual investors in U.S. ETFs, accounting for about 6% of the total number of U.S. households.
  Since the 1990s, the U.S. stock market has experienced three periods of bull market, namely, interest rate liberalization from 1991 to 2000, a 10-year bull run driven by the reform of the private pension system, and continuous interest rate cuts from 2003 to 2007 by the Federal Reserve after the market was exhausted. The bull market of monetary easing in China, and the “buffalo” formed by the quantitative easing policy since 2009. On the one hand, the long-term bull market has thickened the net value of stock assets; on the other hand, it has also attracted incremental capital inflows.
  The most important thing is that it is difficult for active investment to outperform the market. The U.S. capital market is highly market-oriented, the information disclosure system is becoming more and more perfect, insider trading rarely occurs, and the market efficiency is high. The possibility of excess returns has been greatly reduced. Investors have continued to shift from active mutual funds to index mutual funds and ETFs. Since the 2009 financial crisis, the cumulative net outflow of active mutual funds in the United States has been 1.61 trillion US dollars, while the cumulative net inflow of ETFs has been 2.25%. trillions of dollars.
  Finally, the role of innovation in the development of ETFs cannot be underestimated. Since the birth of the first ETF in 1993, the asset class of ETF has been extended from stocks to bonds, commodities, currencies and foreign exchange, and the investment strategy has been extended from indexed investment to active management and Smart Beta, and the margin ratio has also been continuously reduced. Major innovations in the U.S. ETF market in recent years include asset classes (Bitcoin ETFs, etc.) and robo-advisers (investment strategies). Among them, in October 2021, the first Bitcoin ETF in the United States, the ProShares Bitcoin Strategy ETF (BITO), was listed, tracking the price of Bitcoin futures traded on the Chicago Mercantile Exchange. Secondly, the robo-advisor market in the United States has begun to blow out. The market share of new robo-advisor companies such as Wealthfront and Betterment has continued to expand, and the assets under management have exceeded one trillion US dollars. It is expected that the number of users and penetration rates in 2023 will reach 13.78 million and 4.1%, and the asset pools of these robo-advisors are mainly ETFs, because they can achieve low product prices, transparent investment processes, decentralization of investment targets, and convenient risk control.

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