Big Trends In ETFs For 2009

December 09, 2008

I've been thinking recently about what big developments we'll see in the ETF industry in 2009.

Not just for fun: I have to write an article for the January 2009 issue of the Exchange-Traded Funds Report, in which I'm supposed to give my vision for where the industry is heading next year.

It's a daunting task, given all the rapidly moving parts in the ETF business right now.

To make things a little easier, I figure that the place to start is with what happened in 2008. And man-o-man, 2008 has been a doozy.

The biggest story, obviously, is the credit crisis. We already know some of the fallout: ETF assets are down and a number of funds have been closed. At the same time, the ETF industry has shown tremendous strength, gaining market share on a relative basis and maintaining positive inflows throughout the market downturn.

It's hard to overstate how impressive that last statistic is: ETFs have enjoyed positive net cash flow in September, October and November ... cumulatively the worst bear market in a generation. It shows an incredible underlying strength in ETF demand, which I think will manifest itself in a major way once the market starts to rebound.  

It's why I think the biggest story in 2009 will be a direct corollary of this: I think ETFs will make substantial market share gains against mutual funds in 2009, and will end the year holding well over 10% of total fund assets.

The other big story of 2008 is trading: ETF trading volume has skyrocketed, rising 72% over year-ago levels. Most days now, ETFs occupy four or five of the top 10 most traded security slots in the U.S. They now regularly account for 30%+ of the total trading volume in the market.

The media has been paying more attention to trading issues recently. When I first wrote about ETF spreads in May 2008, almost no one was talking about them, and most still believed that it was only the liquidity of the underlying and not the liquidity of the ETF itself that determined the spread on an ETF. Now, the discussion of ETF trading spreads has been picked up in the national media, most notably (and with the best reporting) in the Wall Street Journal  (see here, here and here).

I think trading will continue to be a major story for the ETF industry in 2009. I think we'll see more products launch that specifically target the trader market, and an ever-increasing focus on ETF spreads as a key factor for investors.

The other big story in 2009, I think, will be the entry of new, large-scale players into the ETF market. The Securities and Exchange Commission should finally approve its rules allowing fund companies to launch "traditional" ETFs without gaining exemptive relief first. That, combined with the efforts by companies like PIMCO to move into the space regardless of SEC action, could create a second boomlet in the ETF market as big mutual fund companies try to avoid "missing the boat" on ETFs.

There's a lot brewing in the industry right now, and 2009 will be incredibly interesting. I'll have a lot more, including a look at the data, in my January ETFR article.

BTW: For those of you who want to keep up with my daily thoughts on ETFs and the market, you can now follow me on Twitter: ETF_Twitter

(Fair warning: It includes some thoughts about intraday and short-term market activity. I do not and would not trade on these thoughts, but I can't keep my eye off the market these days. It's just too much fun.)



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