Just doing some thinking about the growth and future of the ETF industry: In my eyes, ETFs began as a second-generation of mutual funds with the following characteristics:
- Passively managed: ETFs were passively managed (though that's changing), building upon Jack Bogle's success at Vanguard. Most research at the time clung to the Efficient Market Hypothesis and academics declared that trying to beat the markets was a fool's game. ETFs were this vehicle.
- Cheap: They were cheap. If theory shows that you can't pick stocks and win the game that way, better to index and reduce fees for better long term success. ETFs' passive structure enabled fund sponsors to get big and compete on price, driving prices further downward.
- New access: Beyond their philosophical underpinnings and reduction in asset management fees, ETFs also opened doors to new asset classes (commodities), markets (Peru), and strategies (leveraged short funds) that weren't easily accessible or understandable for retail investors previously.