- The Washington Times - Monday, September 14, 2009

BOSTON | At 16, and with $640 billion in assets, the U.S. exchange-traded fund industry isn’t exactly wet behind the ears.

ETFs still lag far behind U.S. mutual funds’ more than $10 trillion in assets. But ETFs are gaining on their more established rivals, due in part to a selling point that has been a big draw in recently volatile markets. ETFs can be traded like stocks throughout daily trading sessions, unlike mutual fund shares that change hands at end-of-the-day prices.

Clearly, many investors are getting the ETF bug. Nearly $184 billion flowed into U.S. ETFs during the 12 months ended July 31, while stock and bond mutual funds saw $81 billion go out, according to the Investment Company Institute.

With more than 700 ETFs in the United States, the offerings have become so diverse that investors can gain exposure to everything from oil industry equipment suppliers to the movements of foreign currencies like Sweden’s krona. Most ETFs track a market index and focus on stocks, but actively managed ETFs and bond ETFs have also entered the fray.

Michael Latham is at the center of it all as U.S. head of Barclays’ iShares business, which commands about half the U.S. ETF market, far ahead of its closest rivals, State Street Global Advisors and Vanguard Group.

IShares’ leadership in a growing industry is a key reason why New York-based asset manager BlackRock Inc. is acquiring Barclays Global Investors, the investment arm of London-based Barclays. BlackRock announced plans three months ago to snap up BGI in a $13.5 billion deal expected to close by year end.

In a recent interview, Mr. Latham, 43, discussed growth prospects and challenges for San Francisco-based iShares and the ETF industry. Here are excerpts:

Question: Do you expect any big changes after BlackRock becomes iShares’ new owner?

Answer: We really don’t expect any major change at all, other than now we are part of a much larger organization. We see that as all positive. We are going to continue to focus on educating financial advisers and investors about how ETFs work.

Q: Smaller ETF players have been consolidating lately and account for many of the more than 50 new ETFs this year. Do these trends pose a competitive threat to iShares?

A: We don’t see it as an issue for us at all. As more new entrants have been entering the ETF market over the past 10 years, it’s really increased the interest and education in ETFs. As more people learn about them, the pie grows, and as a leader in the industry, we will benefit over time. Ultimately, to be successful in the ETF business, we feel strongly that you need scale.

Q: Do you foresee a time when the ETF market is so crowded that fewer players will be able to keep expanding?

A: My business school teachers would definitely say that day is coming, but I just can’t see it yet. And I’m not sure it’s going to be in my business lifetime. It really feels out in the market that we’re at the tip of the iceberg.

Q: Many newer ETFs are narrow, tracking the performance of a single industry, overseas market or commodity. Do you see the niche trend continuing?

A: Some folks are getting into the market and realizing it’s not as simple as maybe they thought, and then are exiting.

We’re not looking for an investment fad. We’re looking to provide the building blocks of different asset classes for long-term investing.

In June, we launched an ETF that focuses on Peru, the iShares MSCI All Peru Capped Index (EPU). It already has $70 million in assets. But we don’t evaluate product development based on assets gathered in the first year or first six months.

Q: Do you expect to see more country-specific ETFs?

A: Yes. We’ll continue to launch more countries as investable markets make it possible for us to provide the product.

In the past, if you had a view on Brazil’s market, you bought shares of a specific company like Brasil Telecom. Now, you’re able to get a Brazil ETF, and get diversified exposure across the entire country. And that is a very common place for us to gather assets.

Q: Any other new growth areas you see?

A: We’ll also be doing more bond ETFs because we think the fixed-income market is underserved. And we’ll be looking at more strategy-based products — it might be asset-allocation products, or more complex products.

Q: What about actively managed ETFs? BlackRock is a well-known active fund manager, so active ETFs could be a natural fit for iShares under new ownership.

A: We’re looking at it. But I think there is a lot of complexity around what you define as an active product. If you start with a true active stock selection, I find it hard to see how that works in a fully transparent ETF. Normally an active manager won’t want to make public all the bets he or she is taking in individual stocks, because other investment professionals may take advantage of that.

So there is a natural barrier for true active ETFs. I think ETFs will be a great vehicle to deliver asset allocation models, and different types of strategies where transparency isn’t an issue. I think you will see more innovation in that regard over the next few years, definitely.

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