Popularity Surges for Exchange Traded Funds

Worldwide investment in exchange traded funds grew 6.7 percent in the first quarter of 2011 as investors poured an additional $41.4 billion into the specialized products.

First quarter growth for exchange traded funds is more than double that seen in the first quarter of 2010, according to BlackRock, a leading financial research and service provider. Global assets under management in exchange traded funds now stand at nearly $1.4 trillion.

Exchange traded funds are index funds that trade like a stocks and offer exposure to both broad and narrow market sectors, such as large Chinese companies or the energy industry. They’ve become a popular tool for investors seeking diversification, a strategy used to balance a portfolio to better weather financial ups and downs. Extreme market volatility, brought on by political unrest in the Mideast and Africa and the earthquake and tsunami in Japan, appeared to be driving investment in exchange traded funds

“The products offer a menu of cost-effective, transparent products that deliver diversified market exposure – attributes that are highly valued during 2011’s tumultuous first quarter,” said Deborah Fuhr, global head of ETF Research and Implementation Strategy at BlackRock.

Fears of inflation also appears to be driving investment in ETFs offering exposure to commodities, high dividend paying stocks, high yield fixed income, and gold and real estate, said Fuhr. ETFs with commodity exposure attracted $6.3 billion in new investment in the first quarter of 2011, with agricultural commodities capturing $3.6 billion of these assets.

Affluent investors surveyed in December by Spectrem Group show an increased interest in investing in ETFs.

“The ownership of ETFs has grown dramatically within these households,” said Catherine McBreen, Spectrem’s managing director. “The move may reflect a lack of confidence in the U.S. economy, as well as desire to diversify from more traditional markets.”

Forty percent of investors with a net worth of $5 million to $25 million owned ETFs at the end of 2010, up from 25 percent at the end of 2009. Their average balance rose from $240,000 in 2009 to $689,840 by the end of 2010.

Investors with a net worth of $1 million to $5 million also increased their ETF holdings. Nearly 30 percent owned ETFs at the end of 2010, compared to 22 percent at the end of 2009. The average balance increased dramatically from $76,000 in 2009 to $232,880 in 2010.