It’s not news that the ETF industry has been taking share from open-end mutual funds.  Despite this widely held belief the ETF industry still lags open-end mutual funds in terms of assets under management by a large degree ($11.61 trillion vs. $1.05 trillion).  The widely-held belief of most industry observers is that ETFs will continue to take market share.

One area where this is likely to occur is in actively managed ETFs.  It was recently announced that the much publicized launch of the actively managed clone of the world’s biggest open-end bond mutual fund the Pimco Total Return ETF is set to launch on March 1st.  Admittedly this is a bit of a defensive move on the part of the open-end industry to try and capture assets headed for ETFs.  You don’t hear a great deal of investors clamoring for actively managed ETFs.  That being said if the Pimco fund turns out to be successful in attracting assets or even keeping funds in the larger Pimco complex you can expect a wave of copycats to follow.

Aside from actively managed ETFs the bigger question for 2012 is where are new ETF assets going to flow.  Are funds new to ETFs going to go the existing behemoth ETFs, 18 of which have assets in excess of $10 billion.  Or are they going to flow into newly launched niche ETFs?  At the moment the trend seems to be pointing towards the big getting bigger.

In 2011 new ETF launches were increasingly unable to garner enough assets (~$30 million) to become self-funding and viable over the long run.  The ETF Deathwatch as of January 2012 stood at a record high of 268 funds.  While the stigma of closing ETFs is holding back some closures, eventually the economics of small fund size will lead to more fund closures.  The question for the industry and investors whether the push for new funds is likely to stall. David Berman at Marketblog writes:

There are only so many products that can be created and lapped-up by investors though. With new funds finding it tough to attract assets, the saturation point may be at hand.

That may not be great news for fund companies looking to break into the ETF game or for existing big name fund providers, like Fidelity, looking to gain a foothold in the industry.  However it may be good news for investors.  If you take a look at the list of the biggest ETFs you see a list of ETFs that is pretty well diversified globally and across asset classes.  What you don’t see is a bunch of narrow focused niche funds trying to exploit the hot new asset class.

The ETF industry is likely to continue to see asset growth along with taking share away from open-end mutual funds.  We have been consistently surprised by the ETF industry’s willingness to bring out niche and copycat funds.  In the end two big factors matter for capturing ETF assets.  First, first mover advantages are real.  In short, the first fund in an asset class or niche often garners the bulk of assets in that class.  Second, fees matter.  Over time the ETFs with the lowest fees tend to garner assets, but this effect takes time to play out.

The big question in 2012 is where those assets will land?  Actively managed funds?  Niche, new funds? Or is it going to be the case that the big just keep on getting bigger?  Actively managed ETFs are a wild card, but for now continue to bet on the big boys continuing to thrive relative to their smaller cousins.

Items mentioned:

Open-end mutual fund and ETF industry assets under management.  (ICI, ibid)

It’s alive!  The actively managed Pimco Total Return ETF is coming March 1st.  (Morningstar, Reuters)

Vanguard wins the ETF new inflow race in 2011, while most new funds failed to attain viability.  (FT, ibid)

New ETFs struggle for assets.  (Marketblog)

Speculating on Fidelity’s plans for their new ETFs.  (Barron’s)

Too much is never enough.  (Abnormal Returns)