The market for exchange-traded funds is ready for a boom, according to a report by Funds Distributor Inc. of Boston and a sister company, Financial Research Corp. The report, which is to be released June 1, says distributors will have a hard time explaining the funds to investors at first. However, they will become "one of the most significant products we'll see over the next decade," said Gavin Quail, senior vice president at Financial Research and co-author of the report.
Three years ago exchange-traded funds managed $3 billion of assets. They now manage roughly $40 billion, said Ken Zurbigg, vice president of marketing at Funds Distributor. Exchange-traded funds are similar to index funds in that they track a set portfolio, but they are traded throughout the day, mostly on the American Stock Exchange, rather than redeemed at the end of the trading day.
Mr. Quill said that, contrary to conventional wisdom, exchange-traded funds may get a big following from investors other than active traders. Because they typically have lower expense ratios and are much more tax-efficient than many categories of funds, they may appeal to long-term investors, he said. The ability to get out during the trading day could be another popular feature, especially for those wary of sudden stock-price plunges, he added.
Aside from selling investors on what is an intricate product, fund companies face the challenge of creating exchange-traded funds that are actively managed. That means convincing the Securities and Exchange Commission that safeguards can be installed to prevent front-running, Mr. Quill said.
Funds Distributor's report, "The Future of Exchange-Traded Funds," gives the category's history and discusses its regulatory obstacles.
The firm surveyed companies that developed exchange-traded funds, and 800 investors who knew little or nothing about them.