Three Secrets of ETFs' Success

The exchange-traded fund industry has grown from less than $100 billion in assets in 2000 to nearly $800 billion today. Here are three secrets of their success, courtesy of ETFtrends:

• Academic ties. Theories born in academia are being put to use in ETFs, author Tom Lydon says. Some good examples, I think, are in Claymore's exotic lineup of ETFs. It includes the Claymore/Ocean Tomo Patent ETF, which includes companies that hold promising patents, and the Claymore/Sabrient Stealth ETF, which tracks "neglected" stocks that are followed by fewer than two analysts.

• Market demand. Average-Joe investors now account for about half of all ETF assets, according to Lydon. The other half is made up of institutional investors and hedge funds. The mainstream adoption of ETFs, he says, is due to the widespread use of the Internet and the transition from commission-based financial advisers (which charge clients based on the size of their assets) to fee-only financial advisers (which charge by the hour for services rendered).

• Asset class availability. ETFs made it possible for regular investors to access commodities, currencies, and metals, which were previously limited to institutional investors.

To continue growing your ETF knowledge, check out 10 Things You Didnt Know About ETFs—but Should.