IU: In general, what do you think determines the success or failure of an ETF?

Rochte: This is the question that I think every sponsor debates behind closed doors: What's the next billion-dollar ETF? The one thing that I think Jim and I both believe strongly is that any successful ETF has to meet the demand of investors in several different market segments. You take any billion-dollar ETF, and with certainty, there's probably a trading community that would trade it and create volume. There's probably a strategic case, and there's advisors out there who may use it in a tactical manner. The third element is the institutional demand.

If you have the trading community, if you have the wealth manager and advisory community owning it in strategic or tactical fashion, and if you have institutions who might use an ETF because there's not a derivative or any other way to access that market, that to me is probably the perfect recipe for the next billion-dollar ETF. When you look at some of the most successful ETFs, I think you can check the box on all three of those market segments, and when you look at some of the ETFs that haven't done as well-and every firm has them-it's probably because you didn't have all three of those market segments engaged.

Ross: I agree with Tony there. The other thing that you have to look at is not just the product itself, but the support you can bring around that product, the education you can give to advisors, the support you can give them through materials, the Web site, the general information flow. This is probably less about the success of one ETF and more about the prospect of being successful in the overall business. Is the quality of the product very important? It's no question that it is, but being able to provide a high-level quality of support is also very important. Having size allows you to do that, because you don't need every ETF to be successful. We know we have launched product that we want in our family lineup and that we believe should be there to have a complete family. Because of competitive reasons or other reasons, that product might not ever be that successful an ETF in terms of its AUM, but it's very important for us to have it in our lineup. We can support that, because offsetting that is $120+ billion of assets in other SPDR ETFs. That really helps balance it out.

IU: Looking back over 2007, what do you think were the biggest developments or trends in the ETF market?

Rochte: Consider the fact that the U.S. fixed-income market is larger than the U.S. equity market and the fact that there's only $35 billion in ETFs relative to a $600 billion ETF marketplace. Entering 2007, there was only one provider of fixed-income ETFs, but during 2007, more than two major providers came in with quality product.

We launched the industry's first Lehman-benchmarked municipal bond ETF. I think munis are a category that is probably not unlike gold and some of the other products that have been launched. There was a huge demand from advisors who wanted access to a transparent, liquid way to buy and sell munis. To me, 2007 was the year of the fixed-income ETF and the year of international ETFs.

Ross: I would agree with that. I think the market will continue to expand into fixed-income arenas and start to focus more on the international fixed-income arenas. We launched the first international fixed-income product in October 2007, the SPDR Lehman International Treasury Bond [AMEX: BWX], and it has really garnered some attention in the marketplace. A lot of advisors and investors have asked us to create investment vehicles that don't correlate well to the U.S. market and U.S. dollar, so I think that product really answered that need.

Another trend is obviously the overall amount of new product that's been brought to the market. It's been significant in the last 18 months-probably more than doubling what was existing. I'm not sure if that's a good trend, a bad trend or just an ugly trend, but it's definitely a trend.

Rochte: Without a doubt, our single most successful fixed-income ETF last year was the SPDR Lehman International Treasury Bond, and it is just shy of $300 million right now. [BWX's assets have increased from the date of the interview to $621 million as of March 11, 2008.]

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