The exchange traded fund industry continues to make strides as total investments in the industry surpassed $1 trillion last year. In 2011, ETFs attracted $100 billion plus in cash for the fifth consecutive year, and more individuals are getting comfortable using the investment products.

The growth of the ETF business is just beginning and more active managers are entering the field. Investors need more education from financial advisors and wealth managers about the benefits and simplicity of ETF investing. What’s more intriguing about the state of the ETF industry is that the recent growth is taking place while stock mutual funds are experiencing outflows and more withdrawals than deposits. [How to Use ETFs in a Trend Following Strategy]

Here are five facts every financial advisor should know about ETFs:

  1. ETF assets are still small compared to the mutual fund business. For every dollar invested in ETFs, mutual funds hold $11. The gap is closing in and the potential for market share is huge. [Vanguard’s Sauter Says More ETF Education Needed]
  2. State Street Global Advisors was the first to market with an ETF. In 1993 the firm launched the SPDR S&P 500 (NYSEArca: SPY), which is still the largest ETF in asset today, at $96 billion in AUM. [U.S. ETFs See More Inflows]
  3. ETF fees are typically lower than a mutual funds because there is not a manager that is stock picking. Management expenses are on the decline as the competition is getting tighter to offer ETFs at the lowest possible price.
  4. ETFs were generally traded by hedge funds and institutional traders in the beginning. Now, individual investors are warming up to ETFs and they are realizing the benefits of a long term buy-and-hold ETF investment. A recent report from Charles Schwab estimated about two-thirds of the net ETF deposits within their brokerage clients were individual investors, reports Mark Jewell for Delaware Online.
  5. Two large areas of the ETF business that have yet to take off are the actively managed ETFs sector and the all ETF 401(k) retirement platform. These are two popular areas of the market that have huge potential for growth in the ETF business. Providers are working hard in the background to create active ETFs and increase the presence in the 401(k) space. [Active vs. Passive ETFs]

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.

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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