January 23 marks the 20th anniversary of the exchange-traded fund industry, started with the launch of the SPDR S&P 500 fund, rolled out by State Street Global Advisors.

Two decades and close to $2 trillion later, other firms such as BlackRock's iShares business and the Vanguard Group also have taken up the torch and are thriving in the funds, whose shares can be traded all day long, electronically.

Global assets invested in ETFs and other exchange-traded products hit an all-time high of $1.95 trillion at the end of 2012, according to the latest data from ETFGI, the London industry research firm. ETF and ETP assets increased by 27.6% from $1.53 trillion at the end of 2011.

iShares is currently the largest player, with assets of $760 billion and a 39% share of the market. State Street is second with $337 billion and 17.3% market share, with its SPDR funds. Third is Vanguard with $246 billion and 12.6% market share. These top three ETF/ETP providers, out of 208, account for $1.34 billion or 68.9% of global ETF/ETP assets. The remaining 205 providers each have less than 4% market share.

"The uncertain and challenging market conditions investors have faced during 2012 and over the past few years, combined with the difficulty in finding active managers that consistently deliver alpha, have caused more institutional investors, financial advisors and retail investors to embrace the use of ETFs and ETPs for strategic and tactical asset allocations," said ETFGI managing partner Deborah Fuhr.

"ETFs provide greater transparency in relation to costs, portfolio holdings, price, liquidity, product structure, risk and return compared to many other investment products and mutual funds," she said.

Dave Mazza, head of ETF Investment Strategy at SSgA, said exchange-traded funds "really had a fairly humble beginning as a product that was looking to track the S&P 500. But it was doing so in very a unique way because it focused on the things that have caught on with investors of all types such as efficiency, access to multiple markets, flexibility of trading intra-day."

At first, ETFs were thought to be more suitable for institutional investors for hedging purposes because they could be traded intra-day. But the pick-up really came from registered investment advisors and retail investors because of their low fees and tax efficiency, according to Mazza. ETFs have a unique "in kind" redemption process which minimizes taxes.

However, the ETF feel-good story of 2012 also included a few sobering interludes such as the closure of Russell Investments' and FocusShares' ETFs last summer. Russell and FocusShares respectively shut down their funds because of "challenging equity market conditions" and the funds' dearth of assets.

Globally, 188 ETFs and exchange-traded products delisted and 18 products merged bringing the total number of closures to 206 products from 31 providers, according to ETFGI. In the United States, 100 ETFs or ETPs were delisted by 14 providers. And more closures will occur in 2013, according to Fuhr.

"Based on our end of year analysis we found that out of 3,343 ETFs, there are 2,197 ETFs that have less than $100 million in assets, 1,830 ETFs have less than $50 million and 808 ETFs have less than $10 million in assets,'' she said.

The breakeven level of assets for ETFs and mutual funds tends to be $100 million. "So two-thirds of all ETFs are below the breakeven level," she explained.

According to Mazza, the closures of ETFs are not necessarily a bad thing. "What that is showing you is that the market is becoming more discriminating as multiple products have been launched in multiple areas of the market," he said.

Mazza also thinks the number of ETF closures this year has the potential to be similar to 2012 because of the greater number of products in the market and advisors' appetites for ETFs that are easily understood and articulated to their clients. At the same time, Mazza said investors are also interested in actively managed ETFs.

Looking ahead to 2013, Mazza expects there to be continued launches of active ETFs, potentially by well-known traditionally mutual fund companies such as Fidelity Investments as well as by traditionally passive ETF shops. For his part, Mazza said SSgA will continue to look for opportunities in actively managed funds, advanced forms of indexing and in fixed-income funds.

SSgA last April launched its first three actively managed ETFs, including the SPDR SSgA Multi-Asset Real Return ETF (RLY), SPDR SSgA Income Allocation ETF (INKM) and the SPDR SSgA Global Allocation ETF (GAL). The firm in October also launched the SPDR S&P 1500 Value Tilt ETF (VLU) and the SPDR S&P 1500 Momentum Tilt ETF (MMTM).

At the time, James Ross, head of Intermediary Distribution at SSgA, said: "We have strong expertise in the advanced beta space which we define as an objective, consistent, transparent process for capturing some investment exposure, while retaining the benefits of traditional indexing."

Mazza also noted that 2013 is going to be a year where a lot of ETFs that launched in 2009 and 2010 are going to come up on their three year track records, which will allow firms to better gauge where they stand among their peers or where those products stand within their own firms.

In a recent interview with MME, Noah Hamman, chief executive officer of AdvisorShares, said he's specifically looking forward to see how Morningstar will rate ETFs with established track records this year.

"We have a product that will be three years old next July, WCM/BNY Mellon Focused Growth ADR ETF (AADR), and it will be interesting to see how Morningstar will rate an outperforming active ETF," said Hamman.

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