NEW YORK—Following periods of market turbulence, investors always look for transparency and liquidity, which will inevitably attract more assets to the $1.2 trillion exchange-traded fund industry, speakers at the Money Management Institute Fall Solutions 2011 conference said Wednesday.

“This has caused a slow and steady, long-term trend toward passive management,” said Sharon French, managing director, iShares/BlackRock.

“When we look back at total passive adoption, we see that adoption continue to increase in periods of heightened market risk from 3% of assets, to 8%, to 12%—and we are now at 30%,” said Scott Burns, director of ETF, closed-end and alternative fund research at Morningstar.

Ands once those assets move into passive instruments, such as ETFs and index funds, they do not tend to leave, Burns said.

“Coming out of periods of uncertainly, people seek transparency,” said Ben Fulton, managing director, global ETFs at PowerShares. “They want to know what the underlying assets are,” which will put ETFs in a particularly key position once the recession turns around.

“They also want the liquidity,” added Anthony Rochte, senior managing director, intermediary business group at State Street Global Advisors.

BlackRock recently did research on how market swings affect discretionary financial advisers, and found that they have become “addicted to ETFs because of their tactical use,” French said. “I find it hard to believe someone would start using ETFs and then stop.”

In fact, Burns added, Morningstar has found that at the large wirehouses, even though ETFs currently make up only 10% of assets, 85% of the new money is going to fee-based accounts, 90% of which is moving into ETFs.

“The last 10 years has been about beta,” Rochte said. “Eighty percent of the market is still in active management. Much like 10 years ago when people were saying they managed money using separately managed accounts, five years from now, you will hear less about ETFs and more about beta and active management.”

Perhaps even more significantly, the awareness of ETFs among investors remains very low. Only 35% of investors in a recent survey by McKinsey said they have heard of exchange-traded funds but have not started using them.

“There is a ton of runway there,” French said.

Further, institutional investors are only starting to get in the ETF game, French said. “Institutional appetite is growing. The pension, foundation and endowment side of the business like the flexibility to maintain benchmark exposure while having the ability to switch managers,” French said. “They are just starting to show a meaningful interest in ETFs.”

-- This article first appeared on Money Management Executive


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