ETFs Cross $1 Trillion Mark

Exchange-traded funds experienced massive inflows in 2009.

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Exchange-traded funds now have more than $1 trillion invested in them, according to a report released by BlackRock. The report indicates that globally, ETFs' assets under management shot up by 45.2 percent in 2009, leaving the funds with $1.032 trillion in them at the end of the year.

[See Mutual Funds: Why the Cup is Flowing Over.]

In the United States, assets under management in ETFs soared from $497.1 billion at the end of 2008 to $705.5 billion by the time 2009 wrapped up. During that period, the number of U.S. ETFs went from 698 to 772. In Europe, meanwhile, ETF assets grew from $142.6 billion to $223.5 billion. "ETFs are growing in importance to investors globally, mainly in the U.S. and Europe, and I think that momentum is going to continue," says Paul Justice, an ETF strategist for Morningstar.

[See Mutual Funds That Bank on ETFs.]

In its report, BlackRock attributes the dizzying growth to the structural attractiveness of ETFs. "During 2009, many investors found that ETFs met their desire for greater transparency in relation to the issues of cost, transparency of holdings, transparency of price, liquidity, product structure, risk, and return," it says.

Throughout the course of the year, fixed-income ETFs gained market share because investors remained cautious about stocks. Assets in fixed-income ETFs grew by 60.9 percent, compared with stock ETFs' 40.9 percent increase. But even with that growth, fixed-income ETFs are still comfortably in the minority: Only 16.2 percent of ETFs' total assets are in them.

Even as they gain increasing prominence, ETFs pale in comparison with mutual funds, which at the end of the second quarter of 2009 had $20.34 trillion invested in them globally, according to the Investment Company Institute. (Year-end figures for 2009 are not available.)

A key difference between ETFs and mutual funds is that ETFs can handle inflows more readily. Mutual funds, particularly actively managed ones, often suffer from growing pains and bloating when they experience hefty inflows.

"The more money you get, the fewer options you really have in finding those outlying performers. You tend to become more like the underlying index or category you're trying to track," Justice says of mutual funds. ETFs, on the other hand, are generally supposed to track indexes, so that's not an issue.

But is it possible for ETFs to eventually take in more money than they can handle? "That's a theoretical limitation that I haven't even pondered," says Justice. "Even if index funds were to grow massively, I still don't see how that's really going to pose a problem."