Visualizing the Expanse of the ETF Universe

View the high resolution version of this infographic by clicking here.

Under the right circumstances, an innovation can scale and flourish.

Within the financial realm, there is perhaps no better example of this than the introduction of exchange-traded funds (ETFs), a new financial technology that emerged out of the index investing phenomenon of the early 1990s.

Since the establishment of the first U.S. ETF in 1993, the financial instrument has gained broad traction — and today, the ETF universe has an astonishing $5.75 trillion in assets under management (AUM), covering almost every niche imaginable.

Navigating the ETF Universe

Today’s data visualization comes to us from iShares by BlackRock, and it visualizes the wide scope of assets covered by the ETF universe.

To start, let’s look at a macro breakdown of the “galaxies” that can be found in the universe:

As you can see, equities are by far the largest galaxy in the ETF universe, making up 76.4% of all assets. These clusters likely comprise the ETFs you are most familiar with — for example, funds that track the S&P 500 index or foreign markets.

That said, it’s worth noting that the fastest expanding galaxy is bond ETFs, tracking indices related to the debt issued by governments and corporations. The first bond ETFs were introduced in 2002, and since then the category has grown into a market that exceeds $1 trillion in AUM. Bond ETFs are expected to surpass the $2 trillion mark by 2024.

Everything Under the Sun

While the sheer scale of the ETF universe is captivating, it’s the variety that shows you how ubiquitous the instrument has become.

Today, there are over 8,000 ETFs globally, covering nearly every asset class imaginable. Here are some of the lesser-known and more peculiar corners in the ETF universe:

Thematic ETFs: Gaining popularity in recent years, thematic ETFs are built around long-term trends such as climate change or rapid urbanization. By having more tangible focus points, these funds can also appeal to younger generations of investors.

Contrarian ETFs: In a healthy market, there can be a variety of different positions being taken by investors. Contrarian ETFs help to make this possible, allowing investors to bet against the “herd”.

Factor-based ETFs: This approach uses a rules-based system for selecting investments in the fund portfolio, based on factors typically associated with higher returns such as value, small-caps, momentum, low volatility, quality, or yield.

Global Macro ETFs: Some ETFs are designed to mimic strategies used by hedge fund managers. One example of such a strategy is global macro, which aims to analyze the macroeconomic environment, while taking corresponding long and short positions in various equity, fixed income, currency, commodities, and futures markets.

Commodity ETFs: There are ETFs that track gold or oil, sometimes even storing physical inventories. Interestingly, however, there are commodity ETFs for even more obscure metals and agricultural products, such as zinc, lean hogs, tin, or cocoa beans.

Whether your investments track popular market indices or you are more surgical about your portfolio exposure, the ETF universe is impressively vast — and it’s projected to keep expanding in size and diversity for years to come.

Top Risks in 2020: Dominated by Environmental Factors

Environmental concerns are a frequent talking point drawn upon by politicians and scientists alike, and for good reason. Irrespective of economic or social status, climate change has the potential to affect us all.

While public urgency surrounding climate action has been growing, it can be difficult to comprehend the potential extent of economic disruption that environmental risks pose.

Front and Center

Today’s chart uses data from the World Economic Forum’s annual Global Risks Report, which surveyed 800 leaders from business, government, and non-profits to showcase the most prominent economic risks the world faces.

According to the data in the report, here are the top five risks to the global economy, in terms of their likelihood and potential impact:

With more emphasis being placed on environmental risks, how much do we need to worry?

According to the World Economic Forum, more than we can imagine. The report asserts that, among many other things, natural disasters are becoming more intense and more frequent.

While it can be difficult to extrapolate precisely how environmental risks could cascade into trouble for the global economy and financial system, here are some interesting examples of how they are already affecting institutional investors and the insurance industry.

The Stranded Assets Dilemma

If the world is to stick to its 2°C global warming threshold, as outlined in the Paris Agreement, a significant amount of oil, gas, and coal reserves would need to be left untouched. These assets would become “stranded”, forfeiting roughly $1-4 trillion from the world economy.

Growing awareness of this risk has led to a change in sentiment. Many institutional investors have become wary of their portfolio exposures, and in some cases, have begun divesting from the sector entirely.

The financial case for fossil fuel divestment is strong. Fossil fuel companies once led the economy and world stock markets. They now lag.

– Institute for Energy Economics and Financial Analysis

The last couple of years have been a game-changer for the industry’s future prospects. For example, 2018 was a milestone year in fossil fuel divestment:

• Nearly 1,000 institutional investors representing $6.24 trillion in assets have pledged to divest from fossil fuels, up from just $52 billion four years ago;
• Ireland became the first country to commit to fossil fuel divestment. At the time of announcement, its sovereign development fund had $10.4 billion in assets;
• New York City became the largest (but not the first) city to commit to fossil fuel divestment. Its pension funds, totaling $189 billion at the time of announcement, aim to divest over a 5-year period.

A Tough Road Ahead

In a recent survey, actuaries ranked climate change as their top risk for 2019, ahead of damages from cyberattacks, financial instability, and terrorism—drawing strong parallels with the results of this year’s Global Risk Report.

These growing concerns are well-founded. 2017 was the costliest year on record for natural disasters, with $344 billion in global economic losses. This daunting figure translated to a record year for insured losses, totalling $140 billion.

Although insured losses over 2019 have fallen back in line with the average over the past 10 years, Munich RE believes that long-term environmental effects are already being felt:

• Recent studies have shown that over the long term, the environmental conditions for bushfires in Australia have become more favorable;
• Despite a decrease in U.S. wildfire losses compared to previous years, there is a rising long-term trend for forest area burned in the U.S.;
• An increase in hailstorms, as a result of climate change, has been shown to contribute to growing losses across the globe.

The Ball Is In Our Court

It’s clear that the environmental issues we face are beginning to have a larger real impact. Despite growing awareness and preliminary actions such as fossil fuel divestment, the Global Risk Report stresses that there is much more work to be done to mitigate risks.

How companies and governments choose to respond over the next decade will be a focal point of many discussions to come.