ETFs - All Aboard! Are ETFs Gaining on the Mutual Fund Industry?

June 19, 2006

Abstract

New York, NY, USA June 19, 2006

ETFs - All Aboard! Are ETFs Gaining on the Mutual Fund Industry?

The exchange-traded fund market will grow to US$1.95 trillion by 2010.

The diversity of investors pouring money into exchange-traded funds (ETFs), coupled with an expanding range of products, will continue to fuel the growth of ETFs. The ETF market will grow to US$1.95 trillion by 2010, from its current level of US$469.2 billion, with an average annual growth rate of 33% for 2006-2010, according to a new Celent report, ETFs--All Aboard! Are ETFs Gaining on the Mutual Fund Industry?/p>

"Exchange-traded funds are experiencing rapid growth due to the actions of a wide variety of market participants," saysDenise Valentine, senior analyst and author of the report. "They may be used in combination to create a diversified core portfolio or as components to provide further diversification into segments such as small-caps or commodities. Still others may use the vehicle for strategies such as tactical asset allocation, tax management, transition management, or short-term trading."

While it doesn't appear ETFs will roil the US mutual fund market any time soon--the US ETF market represents 3.5% of the US$9.5 trillion mutual fund market--they have gain a toehold.

Why the sudden bonanza in ETFs? It is the result of both increased product supply and demand from a wide variety of investors using the product very differently. The retail channel, disillusioned by the traditional market underperformance, benefits from a low-cost vehicle that allows investors to follow a variety of investment strategies. Institutions and hedge funds use ETFs to "equitize" cash (provide an equity exposure) and enhance returns, as active trading strategies and for transitional portfolios, where investors are shifting assets to a new money manager.

The popularity of ETFs and the diversity of ETF issuers will make for interesting times on the competitive front. The ETF issuer market is active with global participants, many with deep resources. US issuers Barclays Global Advisors (BGI) and State Street Global Advisors (SSGA) are global leaders in ETF assets. European issuers INDEXCHANGE and Lyxor Asset Management and Asia issuers Nomura and Nikko are leaders in their respective markets. On the retail distribution side, several national and regional broker-dealers and banks have launched separately managed account ETF programs over the last year. Firms such as A.G. Edwards, Charles Schwab, Fidelity, IXIS Asset Management Advisors, Raymond James, and TD Ameritrade all have programs.

Currently seven providers, BGI, SSGA, Nasdaq Global Funds, Nomura, INDEXCHANGE, Lyxor, and Vanguard have 90% of global ETF assets. But the distribution of these assets may change as a result of continued financial services consolidation.

The 33-page report contains 16 figures and 7 tables. A table of contentsis available online. 

Members of Celent's Institutional Securities & Investments and Retail Securities & Investments research services can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

New York, NY, USA June 19, 2006

ETFs - All Aboard! Are ETFs Gaining on the Mutual Fund Industry?

Executive Summary 3
Introduction 4
Exchange Traded Funds Market 6
  Growth of ETFs 8
  Investors in ETFs 10
  How Open-End ETFs Work 13
  Global View of ETF Market 14
  Fee Comparison Versus Mutual Funds 17
Mutual Fund Market 20
  US Mutual Funds 20
  Index Funds 22
  Closed End Funds 23
  Mutual Fund Market, X-US 25
  Mutual Fund Fees Decline 27
  Lifecycle Change or Crisis? 28
Going Forward 29
  Product Evolution and New Entrants 29
  ETF Forecast 30
Objectivity & Methodology 32

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