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The Financial Times – ETF glow fades for US investors

A record number of new US exchange traded funds failed to attract substantial investor demand last year, leaving fund operators facing losses in one of the first signs that the industry’s explosive growth may have peaked. ETFs allow investors to trade baskets of securities, such as the S&P 500 or precious metals, on exchanges with low management fees. Their popularity has surged in recent years, drawing investors away from mutual funds. The US ETF industry ended last year with more than $1tn in assets under management, compared with $540bn at the start of 2009. But that rapid growth has attracted scrutiny from regulators, and there are signs the market may be saturated. “There are a huge and growing number of ETFs out there that are truly sub-scale [uneconomic]” said Ogden Hammond, who tracks the industry for McKinsey, the consultancy. “Larger fund managers have more ability to absorb losses, but at some point operators will have to make a decision about pulling the plug.” Data prepared for the Financial Times by XTF, an ETF research firm, shows 79 per cent of the 190 exchange traded products launched in the first six months of last year failed to attract $30m in assets under management, an industry benchmark for profitability. In 2010 the corresponding figure was 62 per cent and in 2009 it was less than half.

Source: Arbor Research

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