ETFs Search for a Second Act

Retail Investors Key to Growth

Will McClatchy, president of ETFZone.com, predicts that assets will grow steadily toward $1 trillion for the next 10 years, simply from money that would have gone to mutual funds.

Others say if that is to happen, ETFs will need to become a staple of retail investors' portfolios.

James Parsons, managing director at Barclay's Global -- the leading global ETF provider with $86 billion in assets -- estimates that retail investors, which includes self-directed and advised investors, make up 40% of the market.

"ETFs are increasingly popular among the fee-based financial planners," says Hughen. "They attract clients who are concerned about getting bias-free advice, and ETFs don't have complicated loads that might skew a financial planner's recommendation."

Dan Dolan, director at Select Sector SPDRs, says a major ETF selling point for financial advisers is tax efficiency, an area where they can add value without putting their credibility on the line by having to pick a winning stock.

Savvy investors can avoid IRS wash-sale rules on individual stocks. You simply sell the underperforming stock for a loss and maintain market exposure by holding a representative ETF for 31 days. "ETFs can come in quite handy," says Dolan.

DeLegge predicts retail investors will eventually buy ETFs for some of the same reasons as large institutions do -- low management fees, daily liquidity, options availability and the ability to sell shares short on either a downtick or uptick. And he suspects retail investors will accept ETFs far quicker than they did mutual funds.

"The first mutual fund was allegedly started in 1924 by MFS of Boston. However, it wasn't really until the 1980s and 1990s that mutual funds became the rage. If ETFs follow this same path, we are looking at a minimum of around 60 years before achieving investment ubiquity. Cut that in half, because the world moves twice as fast as it did before, and we are looking at about 30 years."