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Demand for next generation ETFs

The exponential demand for ETFs recalls the excitement at the height of the private equity cycle, the discovery of hedge funds and investors' enduring passion for real estate.

The sector, coming up for its 15th anniversary from when State Street launched the first "Spider" fund in the US, is humming. Spider is the short form of Standard & Poor's Depository Receipt, or "SPDR", the first exchange-traded fund that tracked the S&P 500 Index.

Morgan Stanley estimates that worldwide, as of end November 2007, there were 1,137 ETFs with 1,847 listings, assets of $773.2 billion, managed by 73 managers on 42 exchanges. The US has the largest number of products and assets under management: 583 ETFs and $550.2 billion, followed by Europe with 412 ETFs and $134.8 billion and Japan with 15 ETFs and $35.3 billion. Worldwide ETF assets under management increased by 36.7% over the first three quarters of last year, which is greater than the 8.6% rise in the MSCI World benchmark in dollar terms.

Average daily trading volumes have increased significantly, according to Morgan Stanley data. By the end of last year, the worldwide 20-day average daily trading volumes in US dollar increased by 264.7% to $89.6 billion from $24.6 billion at year-end 2006. The range and diversity of product is also evident. An estimated 499 ETFs are expected to be launched through 2008: 51 in Europe, 390 in the US and 58 in the rest of the world.

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