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ETFs to Capture 15% of Mutual Fund Market by 2014, FRC Says

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Assets in exchange traded Funds (ETFs) should expand from about 12% of total mutual-fund assets today to 14% of these assets by 2014, Financial Research Corporation said Thursday.

ETFs’ annual growth rate in 2010 and through 2014 should be nearly 19% versus the 23% annual growth rate of the last five years, FRC reported in its Mid-Year 2010 ETF Review.

Driving further ETF growth is the trading influence of ETFs, lower fees and tax efficiency relative to mutual funds, according to FRC, as well as expected wider adoption by institutional and financial advisors.

“ETFs won’t just grow in terms of net flows but will take some mutual-fund market share, as they are a better vehicle for certain types of investments,” said Larry Petrone, a contributor to the recent study, in a telephone interview.

Assets in ETFs – excluding money-market funds and funds of funds – are expected to grow from $302 billion in 2005 to $900 billion by the end of 2010, Petrone says.

“ETFs will continue to pick up assets at the expense of mutual funds, and we expect nearly 15% year-over-year growth in 2010,” noted Lynette DeWitt, the study’s author, also in a telephone interview.

As the base level of ETF assets grows, the compound annual growth rate figure does shrink somewhat, they note.

“ETFs are more tax efficient, and for some investments, this makes them a better vehicle. And for those who want a more trading-friendly vehicle, like an immediate investment in the S&P 500, ETFs also have less expense than mutual funds,” Petrone shared.

“This is why we think ETFs will take some flows from mutual funds, which are still good vehicles for actively managed investments,” he added. “With commodities, however, ETFs make better sense, especially if the ETF trades on the underlying commodity as opposed to futures.”

Still, the FRC study finds, ETF growth will face challenges related to their intra-day trading feature and structural diversity.

Other drivers and challenges to ETF growth include product cannibalization, product diversity, impact of the Internet and trade media, and tracking error; product management style and industry analytic tools; and the future market direction of ETFs — namely, distribution opportunities.

Last week, the Securities and Exchange Commission approved new rules submitted by the national securities exchanges and FINRA that expanded a recently adopted circuit-breaker program to include all stocks in the Russell 1000 Index and a large number of certain exchange-traded funds.


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