Despite muted growth in assets under management last year, following growth of approximately 85% between 2008 and 2010, the global ETF industry’s “position and prospects remain favourable”, according to a report by Moody’s Investors Services.

The poor performance of actively managed funds, an increasing awareness of ETFs as asset allocation tools, and product innovation are reasons for the growing popularity of ETFs, says Joanne Jobs of Moody’s Investors Services.

“Last year was a mixed year for ETFs,” says Rory Callagy, Vice President and co-author of the report, Exchange-Traded Funds (ETFs) – Industry Overview. “The European sovereign debt crisis, concerns about use of derivative in synthetic ETFs and elevated market volatility all proved to be strong headwinds against asset growth.” The industry saw 3% growth last year, after a string of years in which asset growth was in the double digits.

Callagy notes also that while 2011 saw a sharp increase in unsuccessful initial public offerings, leading some to believe the industry was nearing saturation point, slow growth was more a function of asset price declines than waning investor appetite. Indeed, the industry still attracted some $148 billion in new cash flows, and saw more than 500 new product launches.

Fundamentals point to further positive growth trends this year, though the pace of growth likely will continue to be tempered by macroeconomic uncertainties and credit pressures on sovereigns and banks. “The financial crisis acted as a catalyst for expansion,” says Moody’s analyst and co-author Joanne Job, “and ETFs’ lower cost remains one of their most attractive attributes for investors, while many financial advisers have shifted to a fee-based from commission-based business model.”

Job also notes the poor performance of actively managed funds, an increasing awareness of ETFs as asset allocation tools, and product innovation as reasons for the funds’ growing popularity. ETFs are no longer simply “satellite investments,” she says, but form their own fully fledged industry.

Meanwhile, in an unconnected report, entitled Exchange-Traded Funds: Growth and Challenges, released earlier in the week, Celent, a research and consulting firm, said that future growth of the exchange-traded product (ETP) market is no longer something the industry can take for granted.

While the ETP market has made significant progress in the last decade, with a proliferation in the number of funds and assets under management increasing more than tenfold, from $146 billion in 2002 to $1.5 trillion in 2011, “the ETP market is becoming increasingly competitive,” said Anshuman Jaswal, Senior Analyst at Celent.

However, “the potential for active ETFs makes this an interesting space to follow in the coming months,” added Jaswal.

(Source: 'Exchange-Traded Funds: Growth and Challenges', Celent, www.celent.com)