(July 27) – “Exchange-traded funds are gaining favor among investors and may soon evolve into a viable alternative to a broad range of traditional mutual funds, two new reports predict,” reports Danny Hakim in today’s New York Times.
“Exchange-traded funds — investment pools that are similar to mutual funds but trade like stocks — have been around since 1993. Perhaps the best known is called the Spider, which represents the Standard & Poor’s 500-stock index. But this year their ranks have swelled to 59 offerings from 30, all of which trade on the American Stock Exchange. While the stock market treaded water in the first six months, the assets of the E.T.F. group nearly doubled, to $52.6 billion from $35.8 billion, according to Strategic Insight, a New York fund consulting firm.”
“While that is a speck compared with the $7 trillion mutual fund industry, Strategic Insight’s report and a report from the Financial Research Corporation, a Boston consulting firm, predict much growth from the expected introduction of actively managed versions of the funds. So far, investors buy a set pool of stocks, either based on an index or some predetermined industry list.”
“Both reports see the funds shaping up as a logical area of expansion for mutual fund companies but less likely to drain money out of mutual funds than out of individual stock portfolios. ‘This is a real product with distinctive advantages,’ said Avi Nachmany, president of Strategic Insight. “Everyone is trying to figure out how it works.”
“For now, though, the only major mutual fund company to enter the business is the Vanguard Group, of Malvern, Pa. The nation’s largest manager of index mutual funds, Vanguard recently filed with regulators to add exchange-traded versions of five of its index funds.”
” ‘I think the actively managed ones, as opposed to the index products, are going to a more significant degree cannibalize traditional mutual funds,’ said Burton Greenwald, a mutual fund industry consultant.”
” ‘The fact that you can get them at attractive prices,’ he said, ‘trade them and avoid built-in tax liabilities of traditional funds will cause a significant number of shareholders to opt out of traditional funds.’ “
“Mr. Nachmany predicts that actively managed versions of the funds will be available in one or two years. A survey of industry experts by Financial Research puts 2002 as a more likely target, and forecasts that E.T.F. assets will hit $500 billion to $1 trillion by 2007.”