Exchange traded funds (ETFs) are moving on up.

That’s the conclusion of a survey recently conducted by the SEI Knowledge Partnership. The survey sought the views of asset management executives when it came to exchange traded products (ETPs).

We spoke with John Alshefski, senior vice president and managing director and Jay Cipriano, head of Traditional Solutions, both with SEI’s Investment Manager Services Division.

“We’re trying to provide insight into the marketplace,” Cipriano says. The survey was designed to help SEI’s investment manager clients understand the issues that will influence future fund launches, business conditions, as well as develop more competitive business strategies. “There are significant growth opportunities for ETFs.”

Of the firms surveyed, 28%  plan to launch ETPs in the next 18 months, 58% said they have no plans and 14% already sponsor some.

ETPs themselves have grown at a phenomenal rate in just 10 years: from $16 billion in assets in 1998 to $587 billion as of June 30, 2008, a 3,568% growth rate. Last year, assets ticked slightly above the $613 billion mark before retreating in the wake of a market downturn.

As the industry grows, it’s also seeing more providers. In the first half of this year, State Street represented 35% of all flows, while Barclays had 52% of the assets.

With all these new players entering the market space, though, some of the largest ones are seeing their shares in it diminished. For example, earlier this year, Barclays had the seven largest ETFs, but now they account for just five of the largest. There are nine new providers in the market now, for a total of 32.

It isn’t just the providers that are proliferating - there are more and more types of ETFs available to investors now, too. Ten years ago, there were 30 ETFs in 14 Morningstar categories. By the middle of this year, investors could choose from 796 ETPs in 53 of the 68 categories Morningstar uses. SEI notes that the majority of the remaining funds are for single-state municipal bonds.

Competition in the ETF marketplace is getting more and more fierce. Do new providers have the stomach? It seems that they’re willing to give it a try: 28% of the firms surveyed said they would be launching ETPs in the next 18 months. Another 58% said they had no plans and 14% said they already have them.

After the survey was completed, SEI noticed several things in particular:

• The focus of distribution is critical: For new managers looking to break into the market, a strategy and market niche is important. Being the first to market carries particular weight, as those funds almost always gather the most assets.
• Where the market is going: Actively managed ETFs are a focus right now, and broad-based index funds are seen as having potential.
• Infrastructure is a factor: It’s considered a barrier to entry, and those who have gone through it know how important it is.
• The relationship with authorized participants (APs) is becoming a stronger focus, and anything that makes it easier for AP trading can only benefit an ETF provider.

Among both firms that offer ETPs and those that don’t, actively managed and custom products are seen as the most promising. Some of the newer entrants aren’t convinced that the market for index products is played out.

“I think the firms that have launched products have already found success and are now looking for new areas of distribution,” Cipriano says.

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