ETFs may be the hot thing right now, but don't listen to industry insiders when they say this rocketeering will persist. So writes Brendan Conway of Barron's, citing opinions from a study by Berstein Research. "Industry optimism may be less than it's cracked up to be," Barron's warns.

While the study still foresees robust growth for the industry, its prediction that the industry would grow 13 percent per year to reach $6 trillion by 2025 was still far more pessimistic than some of its counterparts. For example, McKinsey & Co. expects ETF assets to reach $4.7 trillion as soon as 2015.

Currently, Bernstein explains, ETFs hold $1.2 trillion in AUM over 1,476 funds. They account for one-third of U.S. equity trading, up from zero two decades ago.

Yet three-quarters of ETF assets are managed by the three giants, BlackRock, Vanguard and State Street. One-third of these are held in 10 funds. Furthermore, over half of all ETFs boast less than $50 million in assets, making their viability on an individual basis doubtful.

Add in the fact that ETFs will probably have a tough time penetrating three big growth areas: active management, 401(k) and other defined contribution plans, and fixed income.

401(k)s may very well be the toughest of them all. Mutual funds hold about 55 percent of the defined contribution market as of year-end 2011, whereas ETFs have less than 1 percent. Bernstein analyst Luke Montgomery pointed out that mutual fund firms have a "lack of motivation" to offer ETFs, especially when index-tracking mutual funds are so cheap.

But no worries. ETFS will "continue growing handily" — just "not as handily as the industry hopes," Conway concludes. 

Edited by: Irene Park


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