Abstract
How can exchange traded funds (ETFs) make further inroads in creating new investment opportunities, and how successful will these products be in broadening their appeal to the average investor? This report examines the current marketplace for ETFs and the potential for capturing significant market share in the increasingly robust retirement market.
The market for ETFs has grown exponentially in the past decade. Once linked primarily to broad market indices, ETFs are increasingly expanding their scope to more narrowly focused sectors. At the same time, the products are slowly beginning to encroach on the qualified plan market previously dominated by mutual funds.
ETFs have grown both in total asset size as well as in the number of total instruments, experiencing unprecedented growth during 2006. This year could see even more activity. Moreover, providers are intensifying their efforts to enable ETFs to be more accessible to qualified retirement plans, creating another venue for growth.
With the entry of smaller firms into the ETF market, the industry' s landscape is already dramatically different from that of 2005. At the end of 2005, four key players sponsored the majority of ETFs on the market-Barclays Global Investors, State Street Global Advisors, Vanguard Group and PowerShares Capital Management. Most of the products were designed to track the broad stock market or a specific sector. Now, smaller firms are launching ETFs and offering funds that either track alternative asset classes or serve narrow niches.
ETF providers are capitalizing on the products' ability to provide individuals with access to investments that have traditionally been restricted to large investors such as pension plans and hedge funds, including foreign markets, oil and commodities. Although active ETFs are not yet a reality in the marketplace, new incarnations of the product have taken on a “semi-active” approach, further blurring the differences between indexed and actively managed strategies.
Multiple distribution channels are likely to continue to expedite ETF growth, as firms are beginning to offer the products more widely, and mutual-fund wraps and SMAs are including them as well. The trend for financial advisors to provide services for a fee rather than a sales commission has also helped level the playing field for low-cost ETFs versus the mutual fund universe.
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