Is the latest proliferation of exchange traded funds (ETFs) a revolution, or is it likened to Wall Street pollution? The recent popularity of ETFs has led to a frenzy of launches, many born in 2006  – more than in all previous years combined. This year 95 started trading on the American markets, with hundreds more in the pipeline, awaiting their launch. David Simonds for The Economist reviews the ETF industry and how providers are racing to be first to market with new products.

The expansion includes new areas such as fixed income, including Barclays’ and Vanguard’s latest bond ETF additions.  ProShares’ launched ETFs last June that includes bets on the standard indexes.  And as the obvious indexes are all accounted for, new ETFs track narrow industries or asset classes, such as HealthShares covering specific areas such as cardio devices.

Simonds also points out some concern for the ETF growth, siting risks in the niche ETFs with liquidity and concentration of holdings in a few stocks.  But rapid trading by hedge funds and institutions helps with the liquidity issue and ETF providers are working hard to educate investors on ETFs and any risks that might be involved.

The pace of innovation will not be swayed, with many challenges still ahead for the ETF industry. ETFs have yet to fully enter the mainstream retirement market and into 401(k)s. Actively managed ETFs are also on the verge of innovation, with many providers looking for a formula that works.  The ETF industry has come a long way, and still has a long way to go.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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