2008: Quite a Year for ETFs

By Matthew Hougan

The exchange-traded fund industry is ascendant.

That's the takeaway from Murray Coleman's new (and superb) year-end review of 2008 ETF data. If you haven't already read Murray's piece, I encourage you to do so immediately. He has taken the excellent ETF data available from the National Stock Exchange and parsed it to reveal how the ETF market developed in 2008. The big takeaway is that ETFs are on the rise.

That may run against conventional wisdom right now. Naive analysts might look at 2008 and call it a bust for ETFs. After all, more than 50 funds closed this year, and total assets under management fell by 13%. 2008 is the first year ETF assets have declined since 1994.

But remember: This was the worst year for global equity markets since 1931. The S&P 500 closed the year down 38.5%, and many global markets were down much more. For ETFs assets to fall just 13% is incredible.

It happened because the ETF industry hit critical mass, as investors and traders alike piled into the structure. Consider:

• 2008 was the biggest year ever for ETF inflows. Investors poured more than $178 billion in new money into ETFs, according to the NSX. For comparison, Emerging Portfolio Funds Research says that investors pulled $320 billion out of mutual funds in 2008.
• December was one of the largest months on record for net ETF inflows, at $42 billion.
• ETF trading was up 70% over 2007 levels, which was itself up 114% from 2006.

I get the feeling that this is just the beginning. When the market recovers—or rather, as the recovery continues—ETF assets and ETF trading will jump again. There are plenty of investors and financial advisors out there who still don't use ETFs, and quite a number who probably don't yet know what ETF stands for. They will. And as those investors come into the market, the results will be impressive indeed.