ETFs Are Here to Stay

Exchange-traded funds (“ETFs”) continued to add to their ever-growing market share of available U.S. investment vehicles in 2008. According to the Investment Company Institute (“ICI”), as of November 2008, there are now 721 ETFs with over $478 billion in assets. As a result of the volatility witnessed in the markets during 2008 that led to many ETFs decreasing in market value, ETF assets as a whole decreased by approximately $94 billion ,or – 16.4%, over the prior 12 month period (i.e. November 2007 – November 2008). On the other hand, the total number of ETFs increased by approximately 18% over this same time period. While the 2008 market performance disrupted the asset growth trend for ETFs, it did nothing to stop the upward momentum of the number of ETFs trading in the market which have now grown, on average, approximately 103% per year since 1995.

ETFs also received a lot of media and investor attention during the third and fourth quarters as investors continued to look for short strategies and found them in funds offered by the likes of ProShares and Rydex. For this and other reasons, ETF volume continued to increase during the second half of 2008. In particular, according to Barclays Global Investors, on one of the largest trading days, based on volume, in U.S. history on Monday, September 15, 2008, ETFs accounted for 40% of the trading volume in U.S. equities that day – 40%!

Needless to say, ETFs are certainly here to say, and are being utilized more and more by retail and institutional investors alike. There are now ETFs and Exchange-traded notes (“ETNs”) that allow investors to invest long, and in certain cases short, in various asset classes, sectors, countries, geographies, commodities, foreign currencies and bond indexes. However, the ETF marketplace has grown at such a rapid rate that many investors and advisors still do not understand the depth of the market or the nuances of the various product structures. I would strongly suggest that these individuals take the time to research this relatively new and innovative product while looking for appropriate ways to use them in their own investment portfolios.