By David Macfarlane

According to BlackRock’s year-end 2009 ETF landscape industry review, ETF assets will grow by 20-30% in 2010. The report says the ETF landscape will continue to evolve in this year and beyond as more products from traditional active asset managers and alternative asset class exposures become available to ‘mainstream’ retail and institutional investors through standardised and regulated fund structures such as UCITS in Europe. BlackRock also points out that hedge funds have historically been difficult for many investors to access with the high minimum subscription levels and maximum investor limits, but hedge funds are now noticing the growth and appeal of ETFs which are simple and easy to access, but have powerful distribution networks. The firm expects to see more hedge funds looking to create ETFs, with their own funds as the underlying exposure, in an effort to broaden their distribution capabilities.

This will, on one hand, give more investors access to the asset class and the ability to do so in small sizes, with daily liquidity, but also make it challenging for them to understand what they are investing in compared to the historical daily transparency of the underlying portfolio in low-cost index based exposures which ETFs have become known for. BlackRock states that it will be important in the coming years to ensure that new generations of ETFs educate investors on their structures and mechanics when they deviate from the traditional definition of ETFs as exchange listed, open-ended, liquid with secondary and primary in-kind creation and redemption (with support from market-makers and other liquidity providers), with real time indicative NAV, and transparent where the underlying portfolio is disclosed on a daily basis.