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Sour markets prove 'catalyst' as investors flee to ETFs

Stock markets are ugly, but interest in exchange-traded funds is booming.

According to research compiled by Globe Investor, the average daily volume for ETFs trading on the Toronto Stock Exchange surged to 25.9 million units in the third quarter of 2008, up from just 6.6 million units in the same quarter of 2007. That represents an increase of about 290 per cent.

"I have long held the notion that there was going to be a catalyst for ETF growth in Canada," said Heather Pelant, head of iShares Canada at Barclays Global Investors Canada. "And I think that the markets that we're in now are providing us with one."

She noted that, virtually overnight, investors have shifted their concerns from being focused mostly on returns to being focused mostly on risk - and the transparency and the ability to find out an ETF's value throughout the day are attractive qualities for exchange-traded funds.

Still, the rise in trading volumes in Canada come at a time when a number of more specific exchange-traded funds are struggling. On Monday, FocusShares, a U.S. firm, announced that it would discontinue four of its ETFs, which had been suffering from low trading volumes. These were not run-of-the-mill index funds, but rather baskets of stocks based on very specific themes, including so-called sin stocks (gambling, alcohol and tobacco), homeland security stocks and suppliers for Wal-Mart Stores Inc.

See David Berman's Market Blog at ReportonBusiness.com

© 2007 The Globe and Mail. All rights reserved.

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