Institutional demand for exchange-traded funds (ETFs) has increased markedly in recent years, fueling rapid growth of a product originally geared towards retail investment, says Moody's Investors Service in its new special comment "ETFs: Increased Liquidity and Product Range Drive Institutional Participation."

Exchange-traded funds are a form of open-ended mutual fund, and are traded on exchanges much like stocks. Like other mutual funds, they allow investors to gain exposure to a diversified portfolio without having to purchase individual instruments. While still only a small portion—approximately 10%—of the overall US mutual fund sector, ETFS have grown rapidly. During the five year period beginning with the credit cycle peak of 2007, total US ETF assets have grown at a compound annual growth rate of 17.07%.

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