ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing

CHAPTER 11

The Future of ETFs

Compared to the mutual fund industry, the ETF industry’s growth has been phenomenal. After only 14 years, there were 629 ETFs with $608.4 billion in assets under management. Including all exchange-traded products, the total was 657. If you consider the 1940 Act to be the start of the modern mutual fund industry, it took 44 years before there were that many mutual funds, and 46 years to accumulate the same amount of assets.

Comparatively, it took closed-end funds, which have been around the same amount of time, 66 years to reach that number. At the end of 2007, there were 668 closed-end funds, nearly the same as total ETPs, but with only half the assets.

After seeing ETFs eclipse the closed-end fund industry in assets, the broader mutual fund industry is finally waking up to the competitor in its house, with many investors now wondering “What is their ETF strategy?” The mutual fund industry likes to say ETFs aren’t cannibalizing their cash inflows, but it’s hard to imagine that if ETFs didn’t exist all that money wouldn’t end up in mutual funds. As more investors become aware of the ETFs and their benefits, it’s hard to view this being anything but a negative trend for mutual funds.

With this rate of growth, it’s easy to envision 1,000 exchange-traded products and $1 trillion in assets by the end of 2008. However, there are some headwinds hitting the ETFs that may cause the industry’s growth to slow. Some of them are a function of the broader economy ...