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By Jeremy Glaser | 12-20-2010 03:38 PM

What's on Tap for ETFs in 2011?

Morningstar's Scott Burns expects to see continued fund flows into ETFs, more targeted fixed-income products, and growth in active and alternative funds in the coming year.

Jeremy Glaser: What's on tap for ETFs in 2011?

For Morningstar.com, I'm Jeremy Glaser. I'm joined today by Scott Burns, he is the director of ETF research at Morningstar, to shed some light on this subject.

Scott, thanks for joining me today.

Scott Burns: Jeremy, thanks for having me.

Glaser: So 2010 has been another good year for ETFs in terms of assets flowing into the space and for a lot of new products, but a question on people's minds is what's going to happen in the next year. What do you think are going to be some of the big trends in the exchange-traded space?

Burns: Well, I mean just in terms of assets and flows, because you brought that up, we do expect the secular push into ETFs to continue. And that's really coming from two fronts. Some of it is really the switch to passive investing, and we see that trend actually echoed in the larger mutual fund space as well.

But also seeing more and more people adopt a macro strategy, so basically swapping out of individual stocks, bonds, commodities, etc., and moving into more thematic, broad-based ETFs that provide the liquidity that you would get with a single security, but in addition [offering] diversification. So that's what we see on trends and flows.

Glaser: So when we're thinking about product innovation, something that the ETF industry has been well known for, what do you think investors could expect next year?

Burns: I think when we look at the passive ETF format, which is really still the preponderance of the products and really the lion's share of the assets, I still think fixed-income is a ripe area for ETF providers to mine. Really, even when you look at the credit area, ETF providers have done a great job breaking up the duration scale, that is one-year, two-year, three-year, etc.

But really in terms of breaking down credit quality, there has been very little movement. We're basically still in a world of a choice of investment grade or high yield, and there is a lot of different bandwidth in between there. So I do expect from a credit perspective to see more product from a sector perspective and country perspective, when we saw actually some of that start this year with launches like emerging-markets bond ETFs, etc.

Glaser: The active ETF space is an area that I think many people thought was going to grow faster than it has. Do you think there is going to be a further push into active management for ETFs?

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