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.
Table of Contents
- Scope of this Report
- What you need to know
- Introduction and scope of this report
- Abbreviations and terms
- Abbreviations
- Terms
- Executive Summary
- Overview
- Fast facts on ETFs
- New products and future trends
- Market Drivers--Current Conditions
- Proliferation of product creating an overcrowded market space
- Challenges to ETF market entry
- Challenges to ETF asset growth
- Structured notes may challenge as new flavor of the month
- Mutual funds may alter their shape
- General public still unfamiliar with ETFs
- Industry providing information for investors to evaluate ETFs
- Ratings agencies furnishing analyses of ETFs
- Morningstar Ratings
- Standard & Poor' s Ratings
- Lipper Ratings
- AltaVista Ratings
- Buyside Research
- TrimTabs Investment Research
- Regulatory activity
- Focus on fees
- Financial intermediaries are paying more attention to ETFs
- Figure 1: Independent advisor comparative product average allocation, 2003 and 2005
- Financial advisor survey results
- Figure 2: Clients' level of interest in alternative investments, November 2006
- Services to help advisors evaluate ETFs
- International and commodity ETFs
- Rollover dollars a possibility
- IRAs may be lucrative marketplace for ETFs
- Deferred compensation plans a largely untapped market
- ETFs designed as lifecycle funds
- Figure 3: Default investment options offered by plans, by size, 2006
- Health Savings Accounts may gain ground
- Market Drivers--New Opportunities
- New ETF strategies are competing with mutual funds
- Financial advisors changing product mix
- Figure 4: Channel comparison--advisor product mix, 2004 and 2005
- SMA growth opening doors for ETFs
- UMAs beginning to take shape
- Qualified plan market opportunities
- ETFs in the 401(k) plan: the next generation
- Case study--Invest n Retire
- Case study--401(k) Retirement Solutions
- ETFs and small business 401(k)s
- Case study--ShareBuilder
- Online brokerages and ETF investors
- Institutional investors and hedge funds focusing on ETFs
- Actively managed strategies for ETFs
- ETFs used within variable annuities
- ETFs in 529 college savings plans
- European and emerging markets ETFs
- Market Size and Segmentation
- Overview
- Figure 5: ETF assets, 1995-2006
- Figure 6: ETF assets, by investment type, 2005 and 2006
- Figure 7: Number of ETFs, by category and expense ratios, 2006
- Figure 8: Number of ETFs and percentage with more than $5 billion under management, 1995-2006
- Figure 9: ETF assets and compound average growth rate versus mutual funds, 2000-06
- Figure 10: Net cash inflows to mutual funds & ETFs, 1999-2006
- Competitive Landscape
- Major players
- Figure 11: ETF sponsors by assets under management, May 2006
- Figure 12: Mutual fund company issued ETFs, 2005
- Competitive landscape by sector
- Commodities ETFs
- Oil ETFs
- Gold and silver ETFs
- Fixed income ETFs
- Socially responsible ETFs
- Financially-based ETFs
- Dividend ETFs
- Sector ETFs
- Niche market ETFs
- ETF options
- Health Care ETFs
- International ETFs
- ETFs with tactical strategies
- Exchange Traded Notes
- Real Estate ETFs
- Advertising and Promotion
- ETF Advertisements
- Figure 13: Print advertisement for Mid-Cap SPDRs, 2006
- Figure 14: Print advertisement for Amex Diamonds, 2006
- Figure 15: Print advertisement for Fidelity ONEQ, 2006
- Figure 16: Print advertisement for Integrity annuity ETFs, 2006
- Figure 17: Print advertisement for Integrity annuity ETFs, 2006
- Figure 18: Direct mail advertisement for Integrity PortfolioNavigators, 2006
- Figure 19: Direct mail advertisement for Integrity AnnuiChoice variable annuity with ETFs, 2006
- Figure 20: Direct mail advertisement for BGI' s iShares, 2006
- Figure 21: Direct mail advertisement for BGI' s iShares, 2006
- Figure 22: Print advertisement for Nuveen Investments, 2006
- Figure 23: Print advertisement for Seligman Target Horizon ETF Portfolios, 2006
- The Consumer
- Summary of consumer findings
- Overview of advisors and ETFs
- Figure 24: Proportion of advisors who invest for individuals, institutions and retirement accounts, December 2006
- Figure 25: Assets under management for those who recommend ETFs, December 2006
- ETFs and other investments
- Figure 26: Percentage of advisors with client assets invested in ETFs, by advisor age, December 2006
- Figure 27: Mean percentage of assets under management invested, by investment type, December 2006
- Figure 28: Mean percentage of assets under management in mutual funds and ETFs, by advisors with individual and institutional clients, December 2006
- Figure 29: Mean percentage of assets under management in mutual funds and ETFs, by advisors whose accounts are primarily retirement accounts, December 2006
- Proportion of clients and portfolio size
- Figure 30: Proportion of clients to whom ETFs are recommended as an investment, December 2006
- Figure 31: Average size of a portfolio advisor would manage for a client to whom they would recommend ETFs, December 2006
- Figure 32: Proportion of clients to whom ETFs are recommended as an investment, December 2006
- Figure 33: Average size of portfolio for which ETFs would be recommended, for financial advisors advising on tax-deferred retirement accounts, December 2006
- Advantages and disadvantages of ETFs
- Figure 34: Advantages of ETFs over other investments, December 2006
- Figure 35: Advantages of ETFs as investments for clients over other investments, by advisor age and income, December 2006
- Figure 36: Reasons for using alternative investments, November 2006
- Figure 37: Reasons retiree clients are reluctant to invest in alternative investments, November 2006
- Reasons for not recommending ETFs
- Figure 38: Reasons for not recommending ETFs, by gender, December 2006
- Figure 39: Reasons for not recommending ETFs, by advisor age and income, December 2006
- Plans to increase allocations to ETFs
- Figure 40: Intentions to increase the proportion of client assets allocated to ETFs, by gender, December 2006
- Figure 41: Percentage of advisors who plan to increase the proportion of client assets allocated to ETFs, by advisor age and income, December 2006
- Types of ETFs recommended
- Figure 42: Types of ETFs recommended to clients, for advisors who recommend ETFs, by gender, December 2006
- Figure 43: Type of ETFs recommended to clients, by advisor age and income, December 2006
- Level of knowledge about ETFs
- Figure 44: Level of clients' knowledge about ETFs, by gender, December 2006
- Figure 45: Level of clients' knowledge about ETFs, by advisor age and income, December 2006
- Figure 46: Level of advisor knowledge about ETFs, by gender, December 2006
- Figure 47: Level of advisor knowledge about ETFs, by advisor age and income, December 2006
- Attractive target segments for ETFs
- Options investors
- Mutual fund investors may be interested in ETFs
- Retirees may be interested in ETFs
- Market Forecast
- Figure 48: Forecast of total U.S. exchange traded funds assets, at current and constant prices, 2006-11
- Appendix: Trade Associations
