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By Jason Stipp | 09-20-2010 01:46 PM

ETFs Out of the Sandbox, Onto the Swing

ETFs have made in-roads with sophisticated, high-net-worth investors but still have room to grow, says ETF Trends' Tom Lydon.

Jason Stipp: I'm Jason Stipp for Morningstar reporting from the 2010 Morningstar ETF Invest Conference here in Chicago.

What is next in the evolution of ETFs?

I'm here today with Tom Lydon. He is the publisher of ETF Trends and the president of the Global Trends' Investments Advisory Service. He is here to tell us a little bit about what he's saying in the ETF industry and where we may be headed next.

Thanks for joining, Tom.

Tom Lydon: Thanks, Jason.

Stipp: First question for you, we are still seeing fund flows into ETFs. We are still seeing new ETFs launched even as some other asset management areas such as active mutual funds are seeing outflows. I guess, I want to ask you first, where are we with ETFs? Are we still ramping up, are we still in the early stages of a growth trend? Or are we starting to see an inflection point to a more mature industry in ETFs?

Lydon: We are mature, and I think we're getting out of the sandbox and maybe jumping onto the swing set. You are absolutely right. There are more flows coming into ETFs when we are seeing money come out of mutual funds. But many of ETF providers are maturing. There are three of four that command the majority of the assets within the business.

Entry to this market has gotten a lot more competitive. And with this land grab pretty much all fully developed, there aren't that many asset classes, sectors, global regions that are yet to grab. But there are new ones that are being created. The question will be, will they be popular?

Stipp: And from the perspective of who's investing in ETFs, I know that there was a panel where they talked about how there is strong adoption at the institutional level first, but then they had to move to advisors and now to individuals. What's the penetration looking like as far as who's actually going into the ETFs? Are individuals adopting them at a higher level now?

Lydon: Well, they have been, but the ETF providers have really been concentrated on the institutions and advisors. At ETF Trends, we have all high-level of self-directed investors that have moved from mutual funds over to ETFs. We are also finding they are pretty sophisticated. 42% have graduate degrees; they've got 10 times the average portfolio size of the average investor, and they are getting over 90% of their information off the Internet.

So they still tend to be more in the sophisticated side. I think we're seeing more and more average investors that will come into ETFs over time, so there is still room to grow.

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