Trillion-Dollar ETF Boom: The Most Successful Financial Product In Two Decades

Trillion-Dollar ETF Boom: The Most Successful Financial Product In Two Decades

The respected United States investment publication, Barron's, has described exchange traded funds (EFTs) as the most successful financial product in the past two decades, and says the gap between unlisted managed funds and listed ETFs will narrow in coming years.

Product innovation, a desire for more transparent, low-cost products, and greater use of ETFs by financial advisers is driving growth. With global ETFs assets topping $US1 trillion for the first time a milestone few thought would be achieved so fast it's clear that investor interest in exchange traded funds is snowballing.

The exchange traded fund (ETF) boom is accelerating, with new research showing global ETF assets have topped US$1 trillion. The ETF Landscape Industry Preview for December 2009 found worldwide ETF assets hit a record US$1.03 trillion in December 2009, up 5.1 per cent on November.

Appetite For ETFs Grows

Global ETF assets have continued to grow despite the financial crisis. The rally in global equities markets from the March 2009 lows was significant. However, the 45.2 per cent growth in global ETF assets in the year to December beat the 27 per cent rise in the MSCI World index in US-dollar terms. Over the past decade the compound annual growth rate of ETF assets globally was 56.3%, in the US it was 58.1% and Europe recorded 90.5%.

ETFs also grew strongly in Australia in 2009. The market capitalisation of ASX-listed ETFs topped $3 billion in December up 185 per cent over 12 months ASX research shows.

Experts say there are no signs that investor interest in ETFs is fading and that investors are finding ETFs are products that work well in every market environment.

Reasons For EFT Growth

Several factors are driving ETF growth. The first was a significant shift in investors' risk appetite in the evaluation of counterparty risk and their desire for liquidity after the challenging market conditions of 2008. In 2009 many investors found that ETFs met their desire for greater transparency in relation to the issues of cost, transparency of holdings, liquidity and product structure.

Product innovation also supported growth. The number of ETFs globally rose 21.9 per cent in the year to December, with 423 ETFs launched and 80 closed. Research shows that ETF issuers worldwide have plans to launch another 817 ETFs.

Another important growth factor was greater understanding and acceptance by retail investors of ETFs as an important investment tool. Respected US publication Barron's, for example, described ETFs as "probably the most successful investment products in the past two decades".

But comments by ETF expert Matt Hougan, of IndexUniverse, an independent US ETF website, that "Main Street still barely knows what they (ETFs) are" suggest significant growth is still ahead as ETFs increasingly become mainstream' investment and trading tools.

Arguably the biggest driver of ETF growth will come from financial advisers. In Australia, fee-for-service financial advisers are leading the way in recommending ETFs. They are following a similar trend in the US, with more advisers moving away from commission-based business models to fee-for-service operations.

The Future For EFTs: Looking Ahead

What of the next few years? Continued strong growth in the global ETF market seems likely as hundreds of new ETFs are listed and investor interest increases. This should result in more specialist research about ETFs to help advisers and investors.

In addition, the global ETF market is expected to increase by 20% to 30% this year, according to information published in the latest ETF Landscape Industry Review of 2009.

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