ETF Industry Headed for Another Record Year

Another growth area is ETFs that track enhanced or fundamentally weighted indices, as opposed to those that weight stocks according to their market capitalizations. These products generated a lot of buzz in 2006 when PowerShares and WisdomTree both launched ETFs based on indices that weigh stocks based on fundamentals. (The companies defined fundamentals differently, though, with PowerShares accounting for sales, cash flow, book price and dividends, and WisdomTree looking just at dividends.)

Other growth areas include ETFs that use leverage to amplify the returns of an index or to move in the opposite direction of an index. ProShares already has a family of such products, and Rydex has some in registration.

There will also be more products that tap into discrete market niches. Some recent examples include an ETF that provides exposure to private equity, one that tracks companies that are buying back their stock and one that follows companies with heavy insider trading. And there are some products under development, called "disease ETFs," that track companies that are developing cures for different diseases.

But it remains to be seen whether any actively managed ETFs will make their way to market next year, although there are a number of such products in registration.

Launching new products isn't the only avenue for industry growth, however. Providers are also trying to pull in more money for existing products by offering them through wrap accounts, annuities and separately managed accounts. But perhaps the biggest potential for growth is making ETFs available in 401(k) plans.

Lee Kranefuss, chief executive of Barclays' U.S. exchange-traded funds business, says ETF providers have had a tough time breaking into the retirement market so far, which he attributes to the fact that "401(k) platforms are antiquated systems" that aren't equipped for intraday trading. It can also be prohibitively expensive for people who make biweekly contributions to their retirement plans to pay the brokerage commissions on ETFs.

Kranefuss says BGI will have a strategy in place by the end of next year for getting its iShares on 401(k) platforms.

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