The ETF Market Can Continue Its Strong Growth Without 401(k) Inclusion

by: Index Universe posted on: July 17, 2008

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By Matthew Hougan

I get tons of questions about when ETFs will appear in 401(k) program. My take? It ain't happening soon.

If you're still a believer, check out Larry Carrel's article on the top of IndexUniverse.com right now.

All you need to know about the state of the 401(k) ETF market is this: WisdomTree (WSDT.PK) is the only ETF provider that allows its own employees to build portfolios of ETFs in their 401(k)s.

BGI doesn't do it; State Street doesn't do it; and neither does PowerShares, ProShares nor the rest of the usual suspects.

What can you say? If you don't eat your own cooking...

Maybe someday ETFs will work in the 401(k) market, but it's not their natural home. After all, two of their biggest advantages - the fact that they are more tax efficient than mutual funds, and that they trade like stocks - are either neutralized or turned into problems in the 401(k) platform.

That doesn't mean that the growth prospects of the ETF market are limited. People seem to think that 401(k)s dominate the investment landscape, when in fact, the industry is split about 50-50. According to the 2008 ICI handbook, 51% of mutual fund assets are held in tax-deferred accounts compared to 49% in taxable accounts.

The math from there is easy: 49% of a $12 trillion market is a $6 trillion market. When you consider the huge advantages ETFs have over most mutual funds in terms of tax efficiency - and the fact that total ETF assets are only around $570 billion - there's plenty of room to grow.

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