ETF Trends
ETF Trends

You’ve seen it several times this year: an exchange traded fund (ETF) shutters, and before long, the stories show up.

“Are ETFs Dead?”

“Was It a Case of Too Much, Too Soon With ETFs?”

“Should We Say Bye-Bye to the ETF Industry?”

Most people will tell you no, no and no. In fact, PowerShares‘ Vice President and National Sales Manager Bobby Brooks, is adamant: “I think we are just getting started. To use a baseball analogy, we’re just in the second inning.”

A key reason Brooks cites is that about two-thirds of the volume in ETFs is institutional investors, meaning that there’s plenty of room for growth on the retail side.

“You’ve seen a plateau, but that plateau is a holding pattern,” Brooks says. The markets are down, and as a result, the industry is flat. “That money is going to come back to work, and we feel there’s a great opportunity.”

That hasn’t stopped many of the ETF naysayers from sounding the death knell. After all, 40 ETFs have closed their doors so far in 2008, and they’re the first closings in the industry since 2006. But Brooks has a question for those who believe ETFs are finished, “Whoever thinks ETFs have had their run, my question is what do they believe is the next growth vehicle?”

When an ETF does close its doors, though, it’s worth taking a look at what went wrong and what could be done better the next time around.

Brooks feels the closings this year are because of a combination of factors: down markets, not-so-hot ideas, lack of interest and so on. “Perhaps their providers didn’t give them enough time, or didn’t do enough to support them. Maybe the strategy wasn’t consistent with a long-term commitment to the business.”

He suggests taking a look at the mutual fund industry, because funds close and merge every day. “It’s just a survival of the fittest that will happen in any business.”

Brooks has heard the criticism that ETFs are launching too quickly, but that happens in any business or industry – the unsuccessful products will be killed off.

The ETF industry does have some room for improvement, namely in the area of education. While many providers are stepping up their efforts, and PowerShares has its own “PowerShares University,” Brooks says there’s still a gap between the number of products available and information on how they can be put to use.

If ETFs get it all right from here on out, though, it’s not a certainty that they would ever overtake mutual funds.

“Mutual funds are at $12 trillion, so if it does happen, it won’t happen very soon,” Brooks says. Instead of focusing on gaining ground on mutual funds, he says, the ETF industry should instead tackle issues such as how to break into the 401(k) markets, something he feels is one of the biggest voids.

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.