Is there a potential downside to ETF portfolios?
The ETF is still relatively new and many ETFs have almost no track record, experts note. That spooks some investors and their advisors, which owns 85%of the $70 billion ETF worth, who keep client assets in mutual funds out of habit.
"There's lots of educating we must do," Rydex's Resnick concedes.
Some investors understand the vehicle but are troubled by the lack of long-term numbers. Others investors prefer active management and generally shun passive instruments such as ETFs, although experts note that producers have started to introduce actively managed ETFs.
"There's a comfort level with traditional funds and some have never dealt with ETFs before and are hesitant," Resnick explains.
Even sponsors are sometimes feeling their way around the ETF market.
For example, Rydex, which has about ten ETFs and some $6 billion in assets under management, has no actively managed ETFs and no immediate plans to offer them.
"We're still looking at that. There's very little record of how actively managed ETFs perform," Resnick says. "My personal opinion is that actively managed ETFs are just too new."
Catching The Wave
How quickly has the ETF business built up?
At the end of 1993, there was only one ETF on the market, with assets of $464 million, reports Richard A. Ferri in The ETF Book. By 1997, ETF assets totaled some $6.2 billion, writes Ferri. By 2002, ETF assets were still only $100 million, according to Cerulli.
But since 2004, ETF assets have been growing at a yearly rate
of 399%, the consultant reports. Continued strong expansion is expected for the industry, most players and observers agree.
"Barring a market meltdown, I can see [the ETF market] becoming a trillion dollar business by 2010," says Cindy Zarker, director of retail asset management for Cerulli.
Ferri, the founder of Portfolio Solutions, writes in his book that ETF assets could reach $2 trillion over the next decade-an assessment shared by Morgan Stanley in a recent report. Ferri also says that ETF assets might equal mutual fund assets in a decade or so and that high-net-worth investors will be a big part of the growth.