In our research this morning we learned that exchange traded funds (ETFs) have about $500 billion in assets under management. It’s a small drop in a large bucket. But it’s growing. Morgan Stanley (NYSE: MS) predicts ETF assets under management will grow to about US$2 trillion by 2011. That’s still just a third of the size of the mutual fund market.
But ETFs are slowly being added to American retirement funds, which means they should attract even more investment dollars. And Steven Calder reports in today’s Australian Financial Review that, “Australian exchange traded funds… are beginning to emulate the staggering success of similar products in the U.S. and Europe.”
This is great news for the individual investor. ETFs make it easier to slice and dice the market into sectors and asset classes and put your money to work where the returns are the greatest-without paying the fees for active management. They are not a replacement for quality security analysis of individual firms. But they do make it possible to get equity exposure to an increasing variety of diverse assets, from regional-based funds, to fixed income and even precious metals and grains.
And if the performance of gold ETFs is any indication, the creation of resource-based ETFs attracts money into them. It’s a liquidity-creating event. Imagine if you could make it rain by simply building a dam. Well- structured ETFs essentially create their own rain by attracting money from pension funds, institutions and retail investors. On the one hand, the money flows are sort of a self-fulfilling bull market. And on the other, the new vehicles make it possible for individual investors to participate in bull markets that used to be the sole domain of big money traders.
So you see, in the midst of big picture gloom about unsustainable trends, there are always undercurrents of opportunity. To the extent those opportunities are liquidity driven or liquidity dependent, your risk is that rising interest rates or a breakdown in financial markets leads to a loss of liquidity. That means falling prices… falling as in a millstone in the deep end of an empty pool.
But there are other opportunities as well that should show some durability in the coming weeks and months. There is no trick to sussing them out. It just means you’ll have to skim past the noise for the real news, which is what we’ll try and to again tomorrow.