Recently, we took a look back at our exchange traded fund (ETF) predictions for 2008. As 2008 comes to a close, and we look to a new year that will see some big changes, we want to take a look at what we think will be the big trends in the ETF industry.

1. ETFs will grab more than their fair share of assets.

In 2008, investors have left the market in droves. If they stayed in, they often turned to safe haven investments like gold and Treasury bonds. This rush to those investments sent gold prices soaring to record highs in the first half of the year, while driving Treasury yields to record lows in the second half.

But investors also took their money out of the markets, and it’s been waiting on the sidelines in anticipation of an uptrend. When the trends emerge again, we predict that ETFs are going to get more than their fair share and that mutual funds will continue to lose assets. They’re below the $10 trillion mark right now, and we think they’re going to have a hard time making a comeback. Some funds are talking about raising fees; others will be hitting investors with big capital gains distributions. Investors aren’t bound to find that very appealing.

Meanwhile, we think ETF assets are going to double. Investors are tired of getting burned, they’re tired of secrecy, of paying too much for lackluster performance and they’re looking for control over their money. ETFs give them the transparency, control and cost-effectiveness they’re seeking.

2. Hedge funds implode, and ETFs will explode.

As investors get back into the markets, we predict that there will be more launches from providers to give these investors more options. As of the end of November 2008, there were a combined 843 ETFs and ETNs in existence. We think that number is easily going to top 1,000 by the end of the year.

Hedge funds, meanwhile, will implode in the aftermath of the Bernard Madoff scandal. We’ll see hundreds of them close because of lost investor trust. A good portion of those investors are going to turn to ETFs.

3. All eyes will be on 401(k)s.

The market has already witnessed the growth of target-date funds and funds of funds. PowerShares in May launched the first “fund of fund” ETFs. Both iShares and XShares offer a line of target-date ETFs that self-adjust as the retirement date nears.

While there are 401(k)s that feature ETFs, including ING Direct’s Sharebuilder, WisdomTree, Invest n’ Retire and iShares, they’re hardly a staple. ETFs are dying for a share of this market, and target-date funds could help them get in.

At the end of 2007, $3 trillion in assets was held in 401(k)s; $1.7 trillion of that was in mutual funds. The mutual fund market share of the 401(k) market has ballooned from 9% in 1990 to about 57% at the end of 2007, the Investment Company Institute (ICI) says.

4. Mutual funds players will realize ETFs are where it’s at.

Pacific Investment Management Co. (PIMCO) has already filed a prospectus for its first ETF, a 1-3 Year Treasury Index Fund. When they made their announcement, many in the industry wondered if this was the beginning of an all-out acceptance of ETFs by the mutual fund industry. Until recently, the typical thinking seemed to be that ETFs were nothing more than a fad, but it’s rapidly proving to be otherwise. We think it’s the beginning of a beautiful friendship.

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