Dan Dolan is director of wealth management strategies for Select Sector SPDRs. Previously, he spent 18 years at Merrill Lynch in a variety of research and management roles. In 2003, Dolan left Merrill to join Alps Distributors to focus on the Select Sector SPDRs operations.

On Wednesday, he discussed recent market changes and the future of sector exchange-traded funds with IndexUniverse.com Managing Editor Murray Coleman.

IU: You started 2008 with $25.9 billion in assets and finished the year with $23.2 billion. Was that a disappointment?

Dolan: We were up 521.6 million shares in 2008. That represented a 77% increase in shares outstanding. In terms of trading volume, our average for all nine Select Sector SPDRs was 260 million shares a day. That was up from 90 million in 2007 and 45 million in 2006.

IU: Most of last year's decrease in assets was related to market depreciation?

Dolan: Yes. We had a great year up until the fourth quarter. The trading volume, shares outstanding and interest in Select Sector SPDRs was all great. But our ETFs are made up of the S&P 500 stocks. And XLF is the biggest of the group, even though Financials were down 55% for the year.

IU: What changed the most for you in the past year?

Dolan: The institutional use of the products continues to evolve. Whereas most ETFs are used as mutual fund substitutes, a lot of the sector-based products are being used as stock substitutes. Many institutional investors are opting for taking a basket of stocks rather than taking the risks of using individual stocks.

IU: Will that change once markets improve?

Dolan: I'll take any improvement in the market and see. The more we see unexpected announcements by companies about hits in off-balance-sheet activities, this lack of corporate trust is going to be with us. 

IU: Are Select Sector SPDRs more of a trading tool then?

Dolan: Clearly when you have the volume of 260 million a day, some are using it as a trading vehicle. But others clearly aren't. They're trying to take advantage of some investment theme. And the short side of the market is pretty active right now as well. Trying to decide which stock to short is difficult. We have about 230 million shares outstanding on the short side right now. And we're seeing more and more of it.

IU: Should Select Sector SPDRs be considered a part of State Street Global Advisors' ETF lineup?

Dolan: Sector SPDRs are advised by SSgA. It really started with a partnership in 1998 between Merrill Lynch, State Street and the Amex. The idea came out of Merrill, where I worked. The indexes are controlled by Merrill Lynch. The assets are managed by State Street and the sales responsibility is Alps.

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