ETFs Continue To Be On A Roll

by: Dorsey Wright Money Management

According to an article on Advisor One, ETFs are on a roll:

One of the bright spots in U.S. markets over the past few years has been ETFs, whose assets have grown at almost 30% a year since 2005 and now total well over $1 trillion. In its most basic form, an ETF is an open-end fund (typically tracking an index) that trades on an exchange. It has a unique creation and redemption process for primary transactions and provides daily transparency of holdings. Introduced in the U.S. 18 years ago, ETFs have been steadily gaining traction among investors and advisors, so that, according to Morningstar, they generate up to 40% of exchange trading volume.

Rydex|SGI, who recently conducted a study about ETF use, found another important factoid:

More indicative of future prospects of ETFs, perhaps, is the survey’s finding that more than half of advisors plan to increase use of ETFs in the next three years. This is in-line with some industry projections that U.S. ETF assets will double, to $2 trillion, in the next five years.

If you are a financial advisor, you need to pay attention to this. Growth of 30% annually for the last five years suggests not just that advisors like these products, but that clients find them attractive as well.

One of the things that we find most useful about ETFs is their ability to target specific asset classes or market segments—perfect for tactical asset allocation. The generally reasonable fees are nice also, but we’re more interested in the investment merits. In the past, only hedge funds were able to get target exposure to many of these asset classes, but now ETFs have made them available to retail investors. ETFs still need to be used wisely, but the performance of some global allocation funds (including DWAFX and DWTFX) shows that it is more than possible.