On the surface, State Street Global Advisors appears to be making a serious run at challenging Barclays Global Investors' longtime dominance in the $539 billion exchange-traded funds market.

In 2008, Boston-based SSgA attracted more net cash flow, some $64.1 billion, to BGI's $53.6 billion. No other ETF providers were even close, with Vanguard a distant third with $25.6 billion in inflows for the year, according to the National Stock Exchange.

In all, ETFs and their exchange-traded note cousins had a gangbuster 2008, as net inflows hit a record $180.4 billion, some 19% greater than a year earlier. (See full report here.)

Of course, some analysts are focusing on the fact that the industry saw a drop in total assets under management. And they've also noted a slowdown in new funds coming to market as a wave of ETFs were closed or merged.

But let's not talk right now about the fact that ETFs actually gained in sheer numbers—758 versus 646 at the end of 2007. Or, that the number of ETNs increased even more on a percentage basis.

And while ETF assets did fall in 2008, the industry wound up in much better shape along those lines than mutual funds.

A Changing Landscape

Still, simply studying gross asset levels provides a rather limited view of what's going on in the market.

Asset figures are calculated combining market returns and cash flows. In the short term, analyzing net flows—how much is going out as opposed to how much is coming in—can prove to be a much better barometer of future health than asset gains or losses in any given year.

So what clues does the latest data from 2008 reveal?

For one, even though SSgA's flows looked quite strong, that was a mirage of sorts. In fact, without the market's original ETF, the SPDR Index 500 (NYSE: SPY), the firm would've had significantly less inflows. SPY generated $34.6 billion alone in net inflows. Minus that production and SSgA's picture dropped to $29.5 billion net inflow.

Then consider that the SPDR Equity Gold Shares (NYSE: GLD) was the industry's third-biggest draw last year, with $4.3 billion in net inflow. Take that amount away and SSgA's cash inflow falls to around $25.2 billion. That would put it below No. 3 Vanguard's $25.6 billion and just ahead of ProShares' $20.4 billion. (No other ETF sponsors even came close to breaking into double digits by year's end.)

But let's not just pick on SSgA. In fact, looking at the top 10 ETFs by size last year, seven were iShares-branded funds. Besides the pair of SSgA funds, only one other made the elite group—the PowerShares QQQ (Nasdaq: QQQQ).

Backing out all seven popular iShares funds leaves BGI with some $23.6 billion less in net inflow. In other words, that means BGI, minus seven of its 175-plus ETFs, had close to $30 billion in net inflow during 2008. (See tables at the end of this column.)

Such a rather stunning statistic shows a lot about the stratified air surrounding today's ETF marketplace. The 10 most popular funds accounted for almost $62.5 billion in net inflows last year. That means another $115.9 billion was scattered among 748 other ETFs.

Is it fair to strip away assets from BGI in such a manner? No, since the seven funds represent some of the least expensive and most diversified players in their respective categories. The continued inflows into iShares as a whole leave little doubt that as a brand, it has earned widespread acceptance in the market.

But such a breakdown does indicate that BGI's seeming dominance in ETFs might face some cracks. After all, even the smallest of ETF providers realistically could be one—or more likely, a few—hit funds away from carving out a much bigger slice of a growing market.

That's probably why new launches aren't likely to go away anytime soon. They might slow. But as long as opportunities to strike the jackpot remain, ETFs will remain a surprisingly fragmented marketplace open to increasing levels of competition.

The fact that net inflows continued in such dour market conditions during 2008 stands as a strong statement about the move by ETFs into mainstream investing.

Winners & Losers

So who are some possible up-and-comers?

Certainly Vanguard has more room to grow, with nearly $7.5 billion more ETF net cash flow last year than in 2007. But one has to wonder about the fate of WisdomTree. It came in as the 11^th-biggest ETF provider in 2008, with nearly $3.2 billion in assets. The fund provider had less than $1 billion in net cash flows, more than a third less than a year earlier.

WisdomTree's ETF family is heavily skewed toward international markets, though. That probably explains much of its slip, considering foreign stocks were hammered even more than those in the U.S. And strategists believe domestic markets will continue to be stronger in a new year. Many of those same experts, however, seem convinced that overseas markets hold the best prospects for long-term growth.

It's also important to note that WisdomTree is expanding into currencies and sector funds. The lineup also now includes different types of indexes weighted largely on fundamental valuations other than dividend streams. Last year, the firm introduced earnings-weighted ETFs.

The company also made big steps in helping pave the way for individual investors into previously difficult-to-access areas, such as India and small-cap emerging markets. Such successes include the WisdomTree International SmallCap Dividend (NYSE: DLS), now with more than $270 million in assets

Still, competition is growing in many niches—both in terms of styles as well as raw numbers. With more than 45 ETFs now, only 10 of which have $100 million or more in assets, WisdomTree could be walking a tightrope. It has estimated that in order to reach profitability, the pink-sheet listed company needs to reach around $8 billion in assets. (See related story here.)

WisdomTree executives say they plan to stay independent. But they won't rule out a merger or buyout by a bigger asset manager with the resources to weather the current economic storm.

Leveraged ETFs With Staying Power?

And then there's the curious case of a rush by investors into leveraged ETFs in 2008. In less than a quarter of trading, the new Direxion family of inverse and leveraged funds—including the first to offer 300% exposure to markets—brought in more than $1 billion in net cash flow.

That might not seem all that unusual considering such negative market conditions in 2008, both in terms of stock price declines and increasing volatility. But at the same time, established inverse and leveraged competitor Rydex had outflows, falling far behind its $1.6 billion net inflow in 2007.

Then contrast that performance against what has become the 800-pound gorilla of the leveraged ETF crowd. ProFunds, through its ProShares ETF unit, easily had the biggest jump in 2008. ProShares inflow soared almost 2.5 times the level reached a year earlier, and its assets more than doubled to $20.5 billion.

It's still too early to tell whether such funds that provide instant shorting and leveraging positions for investors can keep attracting assets through differing market cycles. Yet, ProShares' performance in good times (2006 & 2007) and bad (2008) indicates that as long as volatility is perceived as a clear and present danger, these types of ETFs do appear to have some staying power.

What About PowerShares?

Another interesting race developing is between Vanguard and PowerShares. The former has continued to use its strategy of launching ETFs as second share classes of existing index mutual funds. That has given even its most niche-oriented and newest portfolios built-in customer bases. As a result, it's not surprising the indexing pioneer is showing steady growth both in assets and net inflows for its ETFs.

But PowerShares took a step back in 2008. Its net inflow dropped to $2.3 billion last year, down from almost $8 billion in 2007. And the ETF family that has been one of the industry's most aggressive product launchers attracted less inflow last year than rivals such as Van Eck and Victoria Bay/Ameristock.

PowerShares started the year neck-and-neck with Vanguard in terms of assets under management. It ended 2008 with more than $25.1 billion, down from $40.6 billion a year earlier.

It still is listed as the fourth-largest ETF provider by assets. But with arguably the most diverse menu of styles and categories in its sprawling lineup of 120 equity and fixed-income ETFs—including the industry's first set of active stock ETFs—PowerShares might also be in the best position to hit the jackpot in the future.

And with its acquisition by London-based global asset manager Invesco, the company certainly has the resources to wait as ETF markets shake out and mature. (In fact, PowerShares executives and others discussed such strategies and reasons for launching new portfolios in the July 2008 ETFR cover story, "Survival of the Fittest?")

The past year marked a start to that process with consolidation taking place within the industry on a level not seen before. At least for some firms, taking a few lumps in 2008 might prove profitable in the long run.