April 2nd, 2012 by Tom Lydon

ETF Assets Seen Growing to $5 Trillion By Tom Lydon

March 31st at 6:00pm

The nascent exchange traded fund industry is quickly expanding and garnering greater assets, sometimes at the expense of the mutual industry. At its current pace, ETF assets under management could double in just a few more years as more independent advisors utilize the low-cost investments, according to a consulting firm.

According to McKinsey & company, over the last ten years, assets in ETFs have expanded over 30% annually, compared to a 5% to 6% growth in mutual funds, writes Jeff Schlegel for Financial Advisor. The firm projects global ETP assets to increase to between $3.1 trillion and $4.7 trillion from a little over $1.5 trillion today.

Fee-based registered investment advisors that get paid a percentage of assets under management have been fueling the rapid growth of this fund space. Since RIAs are in the same boat as their clients, the advisors are picking low cost options like ETF to diversify their market exposure.

“There’s an ever-expanding array of choice, and generally that’s a good thing for advisors,” Ogden Hammond, an associate principal at McKinsey, said in the FA article.

McKinsey predicts that the ETF industry has hit an inflection point where product proliferation, specialization, price competition and additional actively managed funds will shift the ETF universe away traditional low-beta ETFs.

The company also expects more mutual fund names to start transitioning over to the ETF space. For instance, heavy-weight PIMCO has already made a successful ETF adaptation of its flagship Total Return bond fund, and others are following suit. [Merk Plans Hard Currency ETF]

“There’s been a lot of discussion and active work going on in the industry on this topic,” Hammond said. “There are ways where you can take a traditional 40 Act mutual fund and convert it in its entirety into an ETF.”

With the intensifying proliferation of ETF products, there is a greater need for education among both investors and advisors.

“The challenge for advisors is sorting through all of the products on the shelf and trying to find the one that’s right for their client,” Hammond added. “I think manufacturers will be more focused on how to better service the financial advisor and educate them on how these products are applicable to their clients.”

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