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ETF Train Moves Full Speed Ahead

Exchange-traded funds have had a banner year, reaching a new peak of $1.7 trillion in assets held, at the end of November. That's a gain of 24.5%, from last year. And a doubling from four years ago.

"We are likely to end 2012 with a record level of assets'' in exchange-traded funds and other exchange-traded products, said Deborah Fuhr, Managing Partner at ETFGI, the London consulting firm that compiles the numbers. This should also reflect "a record level of net new assets invested into the products during the year.''

Globally, assets placed in ETFs and ETPs reached an all-time high of $1.9 trillion at the end of November 2012, according to ETFGI's tally.

Assets in ETFs and ETPs reached all-time highs of $1.3 trillion in the U.S., $359 billion in Europe, $78.7 billion in Asia-Pacific (ex-Japan), $46.9 billion in Japan and $11.6 billion in Latin America. Through the end of November 2012, ETF and ETP assets this year have increased by 23.8% from $1.5 trillion to $1.9 trillion.

Overall, $21.3 billion of net new money went into ETFs and ETPs in the month of November, according to Fuhr, managing partner at ETFGI. Through the end of November 2012, ETFs and ETPs saw net inflows of $223 billion, $69 billion above the level of net new assets at this time last year.

Worldwide, Vanguard gathered the largest net ETF and ETP inflows in November with $7.7 billion, followed by BlackRock's iShares business with $7.2 billion and State Street's SPDR ETFs with $5.4 billion.

Domestically, Vanguard also has gathered the largest net ETF inflows for the first 11 months of the year, gaining $53.3 billion. That is followed by iShares' $45.5 billion and SPDR ETFs at $18.5 billion.

The iShares business is currently the largest ETF provider in terms of overall assets held at $516 billion. That amounts to a 43.9% market share.

Vanguard is second with $242 billion and 20.6% market share, followed by SPDR ETFs with $234 billion and 19.9% market share. The top three ETF providers account for 84.4% of U.S. ETF assets, while the remaining 32 providers tracked each have less than or equal to 5% market share, according to ETFGI.

The big arrivals of the year: Actively managed ETFs-and its embodiment in the Total Return ETF (BOND) from Pacific Investment Management Co. The Total Return ETF, which is an exchange-traded offspring of the Total Return mutual fund from PIMCO, had raised $3.9 billion as of Dec. 11. The mutual fund is the world's largest, with $285 billion in assets.

All told, actively managed ETFs crossed the $10 billion threshold in assets accumulated for the first time, by the time November ended, according to the AdvisorShares Active ETF Report.

There are currently 12 active ETF sponsors managing 55 active ETFs. PIMCO now dominates the active ETF market with close to a 61% market share followed by WisdomTree at 27% and AdvisorShares at 6.7%.

Noah Hamman, chief executive officer of AdvisorShares, noted that while $10 billion may not be a lot relative to the entire industry, it's a small milestone for the sub-sector, which is on the path to significant growth.

"Active ETFs are growing at a rate of 100% like index-based ETFs did back in 1993 through 1996 when they were significantly smaller. Active ETFs are seeing more assets in the same timeframe than index-based ETFs did when they were just four years old," he said.

While Hamman acknowledged PIMCO's effort in the space, he said that he's content with his firm's growth compared to some of the other ETF shops that have come into the market and not make it.

For example, this past summer Russell Investments closed 25 index-based ETFs while FocusShares, an affiliate of discount broker-dealer Scottrade, liquidated its family of 15 ETFs.

"We've been happy that we've been able to grow by offering unique strategies in an active ETF structure," said Hamman.

AdvisorShares is launching the AdvisorShares Pring Turner Business Cycle (DBIZ) ETF on Dec. 19. The fund will bet on stocks, bonds and commodities and will employ business cycle research from a subadvisor, Pring Turner Capital Group, to govern choices. It has a net expense ratio of 162 basis points.

"We're taking a strategy that Martin Pring has developed over time that looks at the business cycles from a technical perspective and changes based on what business cycle we're in," said Hamman.

Hamman added that the firm is also teaming up with Newfleet Asset Management, a subsidiary of Virtus Investment Partners, to manage a global short-income duration strategy in early 2013. The firm also has an international short fund and a gold fund in the hamper.

Heading into 2013, Hamman said to watch out for more active ETFs from bigger firms such as Fidelity, which recently sought permission from the Securities and Exchange Commission for its own active ETF offering, including a corporate bond fund.

In 2013, fund managers will be watching how established active ETFs with track records of three or more years start to be ranked by Morningstar.

"We have a product that will be three years old next July, WCM/BNY Mellon Focused Growth ADR ETF (AADR), and it will be interesting to see how Morningstar will rate an outperforming active ETF," said Hamman.