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ETFs poised for further growth in 2012, says Moody’s

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Growth in global exchange-traded funds, or ETFs, slowed significantly in 2011 after increasing by approximately 85% between 2008 and 2010, Moody’s Investors Service says in a new report. Despite more muted growth last year, however, the industry’s position and prospects remain favourable.

The new report, entitled "Exchange-Traded Funds (ETFs) – Industry Overview" is now available on www.moodys.com. It covers the key players in the industry, including flow data on major market segments.

"Last year was a mixed year for ETFs," says Vice President and co-author of the report Rory Callagy. "The European sovereign debt crisis, concerns about use of derivative in synthetic ETFs and elevated market volatility all proved to be strong headwinds against asset growth." The industry saw 3% growth last year, after a string of years in which asset growth was in the double digits.

Callagy notes also that while 2011 saw a sharp increase in unsuccessful initial public offerings, leading some to believe the industry was nearing saturation point, slow growth was more a function of asset price declines than waning investor appetite. Indeed, the industry still attracted some $148 billion in new cash flows, and saw more than 500 new product launches.

Fundamentals point to further positive growth trends this year, though the pace of growth likely will continue to be tempered by macroeconomic uncertainties and credit pressures on sovereigns and banks. "The financial crisis acted as a catalyst for expansion," says analyst and co-author Joanne Job, "and ETFs’ lower cost remains one of their most attractive attributes for investors, while many financial advisors have shifted to a fee-based from commission-based business model."

Job also notes the poor performance of actively managed funds, an increasing awareness of ETFs as asset allocation tools, and product innovation as reasons for the funds growing popularity. ETFs are no longer simply "satellite investments," she says, but form their own fully fledged industry.

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