Some of our clients have asked us whether all the publicity about ETFs (exchange traded funds) is matched by their size and market importance. Here are a few facts to provide perspective.

Mutual funds account for just over 90% of assets of regulated funds, but ETFs at 7% of assets are growing much faster (43% versus 18%).

The growth rates will not remain the same, but if they did, ETFs would overtake mutual funds in total assets in about 14 years. In reality, it will probably take longer. Mutual funds are mature products with mature grow rates. ETFs are new products with high growth rates that probably cannot be maintained at 40+% in the long-term.

The largest mutual fund is the Vanguard S&P 500 fund (symbol: VFINX, total assets $134.7 billion), and the largest ETF is the State Street SPDR S&P 500 ETF (symbol: SPY, total assets $73.8 billion).

In terms of market importance, a look at last week’s trading volume in dollars helps tells the story. The SPY traded $1.5 billion dollars in volume. That was more than any one of Apple (AAPL), Citicorp (C), Google (GOOG), Goldman Sachs (GS), Microsoft (MSFT), Exxon (XOM), General Electric (GE), Bank of America (BAC), Intel (INTC), IBM (IBM), or Walmart (WMT), for example.

The smaller NASDAQ 100 ETF (symbol: QQQQ, total assets $21.6 billion) traded almost $600 million in dollar volume, which is also more than any of the individual stocks listed above. Not too far behind was the Russell 2000 small cap ETF (symbol: IWM, total assets $12.6 billion) that traded more dollar volume last week than all of the individual stocks listed above other than AAPL and C.

The asset wealth among ETFs is not spread evenly. There were 528 equity ETFs as of the end September, but three popular ETFs (SPY for US stocks, EFA for non-U.S. developed country stocks, and EEM for emerging country stocks) represent about 28% of all ETF assets. That leaves about 72% to be shared by the other 525 funds. As is always the case with funds, there are giants and then a steep fall off in sizes toward the mass of funds.

It seems fair to say that looking past all of the logical arguments for ETFs as portfolio tools, the simple facts show that they are a significant force in the market today.

We have pointed out in previous articles that it may be best to wait for new ETFs to establish some traction in the market before investing in them.

Before investing in any particular ETF, you should be sure of minimal bid-ask spreads and enough share volume from moment-to-moment for timely order fills. You should also be sure those ETFs that do not track established indices perform adequately. That requires some time — at least a full year, if not more. With new index ETFs, however, you can examine the history of the index to get an idea of how the fund would have done after adjusting for expenses.

Given those caveats about new funds, we encourage investors to give index ETFs serious consideration as components in portfolio design.

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