David Penn: Let's just start off with a little bit of background. How long have you been with the NYSE Euronext? And what are your responsibilities right now as Senior Vice President?

Lisa Dallmer: I've been with the Exchange for nine years. I joined NYSE in the holding company through the acquisition of Archipelago by NYSE. And then, of course, NYSE merged with NYSE Euronext in 2007. But I've been involved in the ETF space since I joined Archipelago at the end of 2000.

Essentially, my responsibilities at NYSE Euronext involve looking after our global exchange traded products and index space. So it's listing and trading services unique to exchange traded products, which include ETFs, ETNs, warrants and certificates, and what we essentially call ETVs, both in the U.S. and Europe. (ETVs are special purpose trusts that are legally a little bit different than ETFs and ETNs.) Our global index business includes our calculation operations, our licensing model, and our third party services for index calculation services, both in the U.S. and in Europe. We have properties such as the CAC 40, the AEX, and the NYSE 100, etcetera that we calculate and license to ETF or structure product sponsors for use.

Penn: You've been involved with the ETFs, you said, for about nine years or so. Did you have any sense back then that they would ever become as popular as they have?

Dallmer: No. I will tell you this: I was interested in the space when I joined Archipelago because I had spent the first eight years of my career at Bank of America in over the counter derivatives - fixed income derivatives and credit derivatives. I was very interested in the space because ETFs were an exchange-traded, derivatively priced security, but they are not derivatives in and of themselves. I was very interested in that the securities structure.

And as a result of being derivatively-priced securities, ETFs lend themselves to market structure and technology features in a way that the everyday stock such as GE does not. I found that interesting. I also looked at ETFs and I thought it was interesting that essentially you can package into one transaction exposure to 500 securities, as an example.

Penn: That's interesting. Many people tend not to think of ETFs as "packaging", but that packaging has been instrumental in what has made them so popular.

Dallmer: I'm not sure anyone in the industry anticipated how hugely successful the packaging mechanism of an ETF would be, but ETFs have proven to be extremely resilient in up markets, down markets, and sideways markets. It really illustrates what I call "packaging benefits" compared to your standard mutual fund choices.

There are still some investment objectives out there that are better suited in a mutual fund. And others are better suited in an ETF structure. It really varies. I think people have to have an appreciation for the fact that the ETF is really a packaging mechanism that offers transparency and offers potential opportunity for tax efficient holdings for the investor, but it's not guaranteed. It also offers ease of use with their intraday access.

Penn: Certainly. That is a major attraction for the average investor or trader who is getting involved in ETFs.

Dallmer: I love that the average investor has had a greater awareness of ETFs - what they are and what they do. I think that's fantastic.

I always enjoy when I'm out socializing with friends and we talk about finances and investments. When I say to friends, "Well, I'm in the ETF kind of space," they say, "Oh, I have some ETFs." So I say, "Great. Tell me about the investment objective." I try to of emphasize that you have to look at the investment objective. Investing in ETFs doesn't let you off the hook from thinking about what you're actually investing in.

I don't think anyone really anticipated that the space would grow as much as it has. Maybe some of them did. I did not. But I've been very happy. And I think that it will continue as a packaging mechanism to be a very efficient way to deliver investors' exposure to the marketplace.

Penn: Based on what you're saying, I would imagine that the old debate of whether ETFs would replace mutual funds is perhaps not even the right argument to have.

Dallmer: I don't think ETFs will replace mutual funds because I think that there are a lot of mutual funds out there that use an extremely alpha-driven strategy. The non-transparency of the holdings is what makes the strategy alpha-driven, and ETF in the U.S. today are centralized around transparency of holdings.

I actually think they provide each other interesting ways to articulate benefits in and of themselves. You can actually articulate more granularly the benefits of a standard open ended mutual fund in an active strategy or for dollar cost averaging investors or in certain non-taxable accounts. Right? You can say this is why we're in an open ended mutual fund, because we have these needs and strategy in mind. Same holds true for articulating the benefits of ETF with respect to an investors need for low cost, tax efficient, transparent beta for example.

But with regard to the idea of ETFs replacing mutual funds, I don't think that it is an either or. I think both packaging mechanisms or wrappers, so to speak, will exist side by side for many years to come.

Penn: You speak at events like trader's expos and money shows. I'm curious as to what your main message is to your audiences as well as the kinds of questions you get from attendees.

Dallmer: I think with the retail audience, one of the very common questions is: if it is a down market, should I be investing in ETFs?

My response to them is always an ETF is a packaging mechanism. The question you should be asking yourself is: if it is a down market, how do I want to invest? What do I want to be exposed to? Then look at the multiple ways you might get that exposure. Is it an ETF? Is it a mutual fund? Is it a UIT (unit investment trust)? What type of account do you have? Do you have a fee based account? Do you have a commission based account? Etcetera. There are a lot of different choices.

Penn: Is the average investor becoming better at asking those questions?

Dallmer: I think the average investor is getting more and more sophisticated. I think the one exercise I probably recommend most is to just sit down and read a prospectus. There is a lot you can actually learn about an investment strategy and how the fund advisor basically goes about providing the fund a certain kind of exposure by just reading the prospectus. You can learn a lot about how the fund operates. I think that in our current market, as the market goes down, investors inevitably look at their portfolio and say what do I have, what do I want, what do I not want, and they question things. I think one of the places you can find the most information about something you're investing in is by reading the prospectus.

If you're sitting down at a restaurant and you want to order something off the menu and you're allergic to peanuts, you ask, "Does it have peanuts in it?" Right? I think not enough people actually ask their financial advisor what do I actually have and tell me how it's supposed to work.

Penn: Right. Let me ask a similar sort of question a little bit differently. Are there any misconceptions about ETFs that you keep hearing that you wish you could just sort of smite once and for all?

Dallmer: I'd like ETF traders and investors to understand is that ETFs are simply a packaging mechanism. It's important to understand the investment objective inside of it. When I have a colleague or a friend say, "Oh yeah, I invest in ETFs," I say, "Okay, which one?"

It's important to understand and have expectations about what that product is going to do for your portfolio. What's the tax profile it's going to give you? Are you going to get a 1099 or a K-9? The word ETF is loosely used, but some of the commodity products have very different tax profiles than an equity ETF. I think is most important is that they read the prospectus and go to the issuer's website. There's such a rich amount of information available to investors on an issuer's website - tools, FAQs, etcetera.

Penn: Is your message any different when thinking about trading ETFs as opposed to investing in ETFs.

Dallmer: The concept that some products are better for short term traders is totally fair. You've got, for example, the leverage and inverse funds, which are daily reset leverage and inverse funds. You look at the prospectuses offered by those issuers and their websites they very clearly articulate that point. One of them even goes so far as to say these are not for long term use. They get very articulate. I think the point here is they've created a investment strategy embodied in a traded product and these were actually available, as mutual funds years before, and they are designed for a specific use in mind.

I think that's good in a sense that we're finding that not every investor has the same set of objectives. And we can create product and an industry that caters to specific needs. Still, there is an obligation on the part of investors - and traders - I believe, to read the prospectus and make sure that you're actually picking the one that suits your needs.

Penn: I'm glad you brought up the point with the daily returns of the leverage fund. That's been a particular point that our founder, Larry Connors, has really tried to make sure people understand.

Lastly, in terms of the future of the exchange-traded fund investing and trading, we've seen so much change in such little time. Do you have any sense of where we might be headed a year, two years, five years from now?

Dallmer: One thing I will tell you that I think is very positive evidence that we observed at the end of 2008 was that ETFs had greater cash inflows compared to mutual funds - many of which had cash outflows.

I don't know where the market's going to be. I'm not a market predictor. But let's say that you are an investor in an open-ended equity index mutual fund from 1997 through last year (2008), and you had never wanted to take your money out of that vehicle because you didn't want to incur the massive capital gains that you had picked up through the whole bull market. To the extent that those capital gains are now largely erased because the market is so much lower and you've taken your money off the table and reduced your exposure to that equity index, when you do choose to get back in the market, there are ETFs that exist that offer that same investment objective that are available now that may not have been available seven years ago.

Penn: That's certainly a good point.

Dallmer: Let's say you were in a consumer staples fund that you really loved and it followed such and such kind of principles. To the extent that you've locked in some of those losses for tax purposes or just to reduce your exposure to markets, when you do choose to get back in the markets over the course of the next 18 months, 2 years, I think the packaging choices with ETFs that you now have to choose from for that same investment objective are far greater.

I do believe that over the course of the next two years I think the variety and breadth of product offering that's available in an ETF package will definitely be a positive opportunity for the ETF space to recapture some incoming investment relative to mutual funds.

Penn: That's an optimistic note for the world of ETF trading and investing to end on. Thank you very much for your time.

Dallmer: My pleasure, thank you for having me.