Powered by Standard & Poor's MarketScope Advisor
Judging by the numbers, there has been no decrease in the investing public's appetite for exchange traded funds: ETF assets surged by almost $40 billion in December, according to Investment Company Institute data, to close out 2009 at $777 billion, a vigorous 45% annual gain.
While the ETF industry's long-term growth has been impressive–assets have increased by about $100 billion every year since 2002–almost all of those assets are held in taxable accounts, and with ETF sponsors always hungry for more, they have been increasingly targeting the more than $3.6 trillion held in 401(k) retirement accounts as their next territory to conquer.
So far, they haven't had much luck. The Wall Street Journal reported in January that BlackRock's iShares, the largest ETF sponsor with almost half of the market, has just $2 billion of its $372 billion in assets held in 401(k) accounts, indicative of about $4 billion of ETF assets in 401(k) accounts industrywide, the paper said. Only a small number of 401(k) plan providers even offer ETFs as an investment choice, and most of them target small to medium-sized businesses.
With a view to tapping the market for retirement assets, about a dozen target-date ETFs–funds that anticipate contributions will stop and withdrawals will begin at a certain date–are now trading. New York-based Xshares Advisors was the first to market with target-date ETFs, and now has five funds with dates stretching to 2040, while iShares has about eight such funds. These funds have gathered about $180 million in assets, according to ETF Database, and are often composed of other ETFs to conform to a proprietary asset allocation model. Target date mutual funds are a popular component of many 401(k) plans, though they have recently come under scrutiny by the Securities and Exchange Commission after posting steep declines in late 2008. (A number of academic studies have also questioned the validity of target date funds; see InvestmentAdvisor.com for links to some of those studies.)
Only a Beachhead
That ETF providers have not managed to dig their paws very far into the 401(k) honey pot is hardly surprising, since the primary advantages that make ETFs attractive to investors in taxable accounts, tax efficiency and intraday pricing, vanish in a retirement account. The fact that ETFs are able to avoid the capital gains liabilities that mutual funds incur by dumping low cost-basis shares to fund redemptions is meaningless in a 401(k) account, which isn't subject to capital gains tax. Also, most 401(k) plans do not allow participants to make intraday trades, negating the advantage of intraday exchange trading.
