What's on tap for ETFs in 2010

Morningstar director of ETF analysis Scott Burns tells Jeremy Glaser, Morningstar.com's markets editor, that he's looking for some resolution in 2010 of of some of the problems in the commodity ETF space in 2009, as well as real growth from the industry in general and proliferation of ETF products. All in all, next year is set to be jam-packed with ETF activity, Burns believes.

The full transcript is available below and also contains links to other related articles.

Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. It's Ideas Week. Here to discuss with me the ever-changing ETF landscape is director of ETF analysis, Scott Burns. Scott, thanks for joining me.

Scott Burns: Jeremy, thanks for having me.

Glaser: So what do you think some of the big trends for 2010 are going to be in ETF land?

Burns: Well, I think the first thing that I think we're going to see in 2010 is actually a resolution to some old business from 2009. I think the commodity space in ETFs has actually, I think, have been one of the better aspects of ETFs that's really kind of opened up that market. But it's been riddled with a lot of problems here in 2009.

We had UNG basically broke for a couple months during the year, and just commodity funds in general came under fire from the CFTC for position limits and were really kind of victims of their own success.

So I look forward to in 2010 some resolution to that, some driven by the CFTC and whether or not they're going to come out with some rulings about what the position limits really are and kind of end some of this uncertainty.

But on the other hand, I also expect to see some real growth from the ETF industry to help alleviate that, some better designed products that are more able to capture roll yield and aren't victims of this cantango/backwardation problem that's happening right now.

And also just some more funds in general to help alleviate the stress that a couple of these mega-funds have really kind of put on the system. So first up, let's take care of old business.

Glaser: Now one of the trends of 2009 certainly was the introduction of actively managed ETFs versus tracking a passive index. Is that something you see continuing to grow in 2010?

Burns: Yeah, in fact Grail Advisors already has a whole lineup on deck, set to register I think either later this month or early into next year. And we saw PIMCO actually recently just launch their first batch of actively managed fixed income ETFs.

So led by some of those more established players, including PowerShares, and we think not just the current players, but we're going to see some other new entrants either partnering up with these folks or other ETF providers out there.

I'll also think it will be interesting to see, now that BlackRock and iShares have merged together. BlackRock is much more known for its active management, iShares obviously more passive ETF investing. It will be interesting to see if those two can really kind of merge those together and start to bring active ETF structures out under the iShares brand.

Glaser: So you mentioned PIMCO, which just launched ETFs this year. We saw Schwab launch ETFs. Would you expect there to be a ton of new entrants?

Burns: Yeah, I do think that now from a competitive dynamic, now that PIMCO is out there and BlackRock has purchased iShares and Schwab has entered, we're going to see a whole host of new entrants into the ETF space. I think we're going to see established mutual fund companies start to embrace the ETF offering and start to offer ETFs that are similar to what they already offer in the open-end space.

But I also think we're going to see some other platform providers, the TDAmeritrades, and the E-Trades, have to somehow match Schwab's move. So I think we're going to see a lot of new entrants from a lot of different places, and it's going to be really interesting. I do think we are set to see some real product proliferation even more than we've already seen in the ETF space in 2010.

Glaser: One of the things that always surprises me about ETFs is how they manage to slice and dice the market into such unbelievably small slivers. Is it possible to get even more slicing? Are we going to see even more specialised ETFs in 2010?

Burns: Yeah, just when you think that it's been sliced as far as it can go, we have launches like on November 11, Market Vectors launched the Junior Gold Miners. So these are mid cap and small cap gold mining companies. And in not even a month, it's already amassed $521 million in assets. I mean, I almost spit out my gum when I saw it in Morningstar Direct's database there.

So obviously there's still investor appetite for a lot of things that may not on their face seem like they'd have broad appeal. I think we're going to see a slew of these interesting, more alternatives, more slicing and dicing. There's a group out there that's Emerging Global Advisors, that's coming out with sector emerging market ETFs. They're all tools. They have their place.

It's really hard to say whether or not investors will adopt them. I try not to put my own opinion too much on that, because that will only make me look like a fool. But yeah, it's constantly amazing that people come out there with products that would seem very much out on the edge and not have a lot of interest, but man, they are picking up dollars still.

Glaser: So it looks like it's going to be a pretty active year all in all for ETFs?

Burns: Oh, I think so. I think now that the market has recovered and stabilised a little bit, the growth we've seen just coming into the end of '09 here I think is really kind of spring loading for 2010. I think we went into November with something around 860 ETFs [available to US investors], and currently, as of December 3, it was 911.

So it was a very busy month there, and I know there's a lot more in registration, a lot more to come, and we haven't even really gotten to the point yet where these new entrants have filed for their exemptive relief and gotten it yet. So I do think it's going to be a real jam-packed, at least first six months of the year.

Glaser: All right. Thanks for talking with me today, Scott.

Burns: Thanks.

Glaser: For Morningstar.com, I'm Jeremy Glaser. For more information on ETFs, check out the ETF Center on Morningstar.com or the ETF Investor Newsletter.