In 2007, as investors' interest in exchange-traded funds exploded, the once-elite group of ETF sponsors expanded to roughly 20 organizations. According to the Investment Company Institute, ETF assets rose 44% to $608 billion in 2007, while the number of funds expanded to 629 from just 359 in 2006. The forces driving the rapid expansion of ETFs are their low costs, transparency, liquidity, and tax efficiency.
A fearsome foursome
The numbers show that ETFs are in a growth industry, but it remains a highly concentrated one for now. Four sponsors account for more than 90% of all ETF assets. Maintaining its commanding lead, Barclays Global Investors ended 2007 with more than half of all ETF assets under management. State Street Global Advisors, with roughly half that amount, finished off the year with $173 billion. Far behind, Vanguard finished third with $42 billion, and BNY Mellon
Just as assets are concentrated among four sponsors, the bulk of all ETF assets are attached to the top ETFs. The leader is State Street's SPDR S&P 500 ETF
Assets are one indication of the liquidity of a fund, so if you want to find ETFs that will be easy to trade, these four funds -- which account for nearly a third of all ETF assets -- are an excellent place to start.
ETFs' future
The rapid growth isn't ending soon. More than 100 ETFs await registration at the SEC. But if 2007 is any indication, many of these ETFs are likely to be narrowly focused niche funds, suitable only for a small portion of an investor's portfolio.
Nonetheless, additional funds give investors more choices to match their needs more closely. Fund sponsors outside the top four, such as Northern Trust
The next generation
The ETF boom has also inspired the creation of a bond-like instrument that trades on an exchange. Known as exchange-traded notes, these securities consist of senior unsecured debt linked to a specific market index or return stream. There are now more than two dozen ETNs in the market, and most of them have been launched in the past year.
ETNs might be considered a close cousin of ETFs, but they have some notable differences. In general, ETNs involve an underwriting bank that commits to pay whatever a certain investment returns. Unlike ETFs, these investment vehicles do not usually pay interest or dividends before maturity. But they do offer investors access to non-traditional assets, such as commodities and currencies. They therefore add diversification to an all-stock portfolio.
The ETF boom remains in full swing, and there's no end in sight. Just as mutual funds have kept growing steadily in the decades since their introduction, it appears that ETFs will enjoy growth in the years to come.
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