AllianceBernstein casts doubt on explosive ETF growth

Wed Jun 13, 2012 5:11pm EDT

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* 401 market key to U.S. ETF market growth

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By Jessica Toonkel

NEW YORK (Reuters) - Forecasts of explosive growth of the U.S. exchange-traded fund market are greatly exaggerated, according to AllianceBernstein Holding LP.

AllianceBernstein forecasts in a new report that the $1.1 trillion U.S. ETF market will grow by a compounded annual rate of 13 percent, hitting $6 trillion by 2025, far below expectations of a $10 trillion industry by 2025.

But if ETF providers can figure out how to break into the 401(k) market, Bernstein projects 17 percent compounded annual growth.

If ETF providers cannot figure out a way to penetrate the $4.5 trillion 401(k) plan market, their growth will slow at a significant pace, according to the report, entitled "Asset Managers: Will ETF Growth Hit a Wall."

In the current 401(k) market, mutual funds make up 55 percent of assets, according to the report, which was published Tuesday. And that is a problem for ETFs.

"The market is really controlled by the record keepers and those firms are largely mutual fund companies that do not want to give up market share," said Luke Montgomery, a co-author of the report who is an analyst at AllianceBernstein.

Currently, most of these record keepers do not have the technology to facilitate trading in ETFs, which are handled on exchanges like stocks.

"They are the ones who will have to invest in the record keeping to accommodate ETFs," he said.

ETF providers have been gunning for the 401(k) market for years and many say they are overcoming the record keeping challenges.

For example, Charles Schwab Corp plans to introduce an ETF-only 401(k) product in 2013.

"The 401(k) market is absolutely a difficult market to break into, but that does not mean it is not going to change," said Daniel Gamba, head of the U.S. institutional business for BlackRock Inc's iShares.

But there are just not many incentives for 401(k) investors to want ETFs, said Matt Hougan, managing director of ETF analytics at IndexUniverse.

"Some people are saying that ETFs are God's gift to 401(k) investors, but really index funds are God's gift to 401(k) investors," Hougan said. "If you can get a Vanguard index fund for five basis points in a 401(k) plan, why would you want an ETF," Hougan added.

(Reporting By Jessica Toonkel; editing by Walden Siew and Andre Grenon)

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