Inside Money: On a wave of indexation: year of the ETF

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A trillion dollars here, $6 billion there it looks like it's going to be another big year for exchange-traded funds (ETFs).

Elsewhere, that is. As I touched upon in a previous post ETFs have not captured the imagination of New Zealand investors.

The NZX-owned Smartshares, which manages five ETFs across a range of NZ and Australian indexes, looks after assets (mainly from retail investors) of just over $300 million, according to its latest annual report - up from the $192 million reported in 2004 but hardly spectacular growth.

Interesting, too, that the Smartshares KiwiSaver scheme, which invests into the underlying ETFs, was one of only two providers to actually see a decrease in member numbers (-13) in the year to March 2010.

Despite the lacklustre uptake of Smartshares, it is possible - but hard to measure - that many NZ investors and advisers are buying into the ever-increasing range of ETFs now available on the Australian sharemarket.

But while New Zealand hasn't caught the wave yet, even in Australia the surge of support for ETFs has been a long time coming.

(If you can ignore the philosophy here's a fairly decent explanation of what ETFs are and how they work.)

As early as 2001 I interviewed the ancient 'inventor' of ETFs Nate Most who was out in Australia promoting the launch of what he hoped would be that country's first ETF (it wasn't).

Most, who died in 2004 aged 90, was still excited about his invention when I met him and reckoned it would catch on in Australia quickly.

It didn't - partly, or so the ETF issuers in Australia told me - because financial advisers couldn't earn a commission recommending ETFs. Similar story in the US, according to this American financial adviser.

Now, the theory goes, with commissions about to be banned on investment products in Australia, the demand for ETFs has gone through the roof.

Most interesting theory.