ETF Investing: ETFs to expand in 2011; assets top $1 trillion

By John Spence, MarketWatch

BOSTON (MarketWatch) — Exchange-traded funds are poised to see more
growth in 2011 after recently surpassing $1 trillion in assets as the
business continues to challenge the dominance of traditional mutual

"Expect more asset gains for ETFs as financial advisers and
investors become more comfortable with the products," said Tom
Graves, equity analyst at Standard & Poor's.

!! Safety In Emerging-market ETFs !!

Investors looking to play the vitality in emerging markets while
avoiding a plunge like the one in Bangladesh should check how
diversified a fund really is, according to Tom Lydon of ETF Trends.

However, ETFs have also faced increased scrutiny as they move more
into the mainstream, and some wonder if the industry is doing enough
to educate investors on their risks and complexity.

In particular, exchange-traded funds and notes that use futures
contracts to track commodities and other sectors have faced

These products have lost money on the so-called roll trade when they
move into the next futures contract to maintain exposure to the
commodity. When markets are in "contango," longer-dated futures
contracts are more expensive than the spot price. Therefore, ETF
investors lose money on the trade, regardless of which direction the
"spot" or real-time price is moving.

"The criticism is warranted because many investors don't
understand the effect of contango on their returns," said Matt
McCall, president of Penn Financial Group, an investment firm that
uses ETFs in its strategies.

"With energy markets in contango, investors can get confused when
the spot price rises 20% over a given period but they're only up say
10%," he added.

In response, some newer ETFs such as U.S. Commodity Index Fund
 are designed to fight the corrosive effects of contango.
See related story on commodities ETFs at


Vanguard Rising


The ETF business remains top-heavy with the three largest firms
controlling the lion's share of assets: BlackRock Inc.'s
 iShares, State Street Corp.
 and Vanguard Group.

Vanguard's ETF business grew rapidly in 2010 with an
industry-leading net inflow of $40.5 billion, according to data from
the National Stock Exchange.

Through November, Vanguard collected roughly 40 cents out of every
dollar that went into U.S.-listed ETFs. See ETF Investing blog.

Vanguard is gaining market share thanks to its focus on low fees,
solid brand name and investors moving into ETFs from index funds,
observers said.

!! Equity Volatility To Fall Over In 2011 !!

Stock market volatility, particularly in Europe, has picked up
over the last few weeks on continuing fears about European defaults,
resulting in a widening of the Vix/VStoxx volatility gap.

However, some of the smaller firms and newer entrants made decent
headway in 2010 after starting from a low base. S&P's Graves pointed
to strides made by ETF Securities, Charles Schwab Corp.
 , Pimco and Global X Funds.

Source: Marketwatch.Com