IU: Was there a reason for last year's competition to launch municipal bonds? Was it just that that asset class was seeing new interest?

Ross: The simple answer there is that the regulatory relief necessary to do those products came about in May 2007. I think many sponsors wanted to do municipal ETFs, and once that change was made, it was really a race to develop the product, select the right index provider and get the product to market. Because many sponsors were eager to tap this segment, a lot of product came very quickly.

Some people have looked at that and say potentially we were all wrong, that it hasn't grown, hasn't exploded the way I think some people may have thought it would. But I think that munis represent a deep but opportunistic market that will grow at a very, very good pace over years. It's not a hot market; it's not China. It is a steady-growth business where people who invest in it will be long-term investors for years. It doesn't have the trading component to it that Tony talked about with what I would consider the home-run ETFs. The SPDR S&P 500 trades $19 billion a day. GLD is significantly liquid. Some of those products simply have that kind of amazing liquidity, but munis are probably never going to have that level of liquidity because of the trading nature of the underlying bonds. They're very, very good long-term, buy-and-hold products, and they are also cost-effective for the investor.

Rochte: Munis couldn't have been more out of favor in the third and fourth quarter of 2007, and I think growing from $20 million to $107 million is actually impressive. [TFI's assets have increased from the date of the interview to $200 million as of March 11, 2008.] I think if and when munis are in the crosshair of advisors, all muni providers who have an ETF are going to benefit.

Ross: Having disciplined product development means you're going to launch products even if it's not the most favorable market addition for that product because you want that product in your lineup when that market condition changes. The regulatory process is a long cycle, and if you wait for perfect market conditions to start your filing, you're going to miss it.

IU: Last year saw a lot of product launches in the ETF market. Was it too much, too fast?

Rochte: I think the rigor and the discipline that Jim was talking about is something we take a lot of pride in at State Street. We launch quality products; we're not going to just launch anything. What some investors may not recognize is virtually all of our ETFs, with the exception of a few first-generation ones, have a board. We work with our board, and we talk about new product development. We feel we have an obligation not only to prospective shareholders with these new ideas, but also to existing shareholders. I think we've done a good job in launching good, quality product and not just putting too many products out there to see what works.

IU: Where do you see the ETF industry in the next five years in terms of maybe assets and number of funds?

Ross: There are over 400 still in filing, so the number's probably going up.

Rochte: Yes, I think the number's going up, and the traction of the ETF business is going to continue to grow. I was down at the Inside ETFs conference, and the number of advisors in that room who were new to ETFs amazed all of us. There were a lot of new folks there, so I think it shows that we've all done a good job of getting the word out and educating a very large audience of advisors about the products. But, we still have a lot of work to do, and that's a very positive growth trend. Knowing that there are more advisors out there means it's not a market share game, it's a growth game. I think that's significantly better than if your goal is to take market share from the folks next to you in a situation where the whole pie is known.

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