Assets of exchange-traded products--including equities, fixed income, commodity and other instruments-- surpassed $1 trillion for the first time last week. The equity ETFs we cover account for about 73% of that figure.

The news sparked more media debate about whether ETPs have grown too rapidly, like MBS and CDOs before them. We think that's a spurious comparison. Rather, ETFs are part of a longer-term shift towards indexing. Among equity funds, assets in index funds (both ETFs and mutual funds) have increased from 3% of total assets in 1993 to an estimated 28% today, meaning that they have taken market share away from actively managed funds.

This "Rise of the Indexers" has interesting implications for indexers and stock-pickers alike. While we believe ETFs are an excellent vehicle for asset allocation between areas of the market, what we call the "Central Paradox of Indexing" means that at some point the practice of indexing itself starts to increase market inefficiency, thereby expanding opportunities for stock-pickers.