ETF Onslaught Only Beginning

Earlier this summer, Jim Cramer wrote that he thought the market was saturated with exchange-traded funds. If you're under the same impression, let me warn you: you ain't seen nothing yet.

There are only about 250 ETFs on the market. According to the Investment Company Institute, there are more than 8,600 mutual funds (not to mention over 6,000 unit investment trusts).

Given those figures, does new ETF issuance really sound so excessive?

The creation of new ETFs seems to be picking up steam, and the reason is that they are the future of this industry. And they're particularly problematic for traditional, open-ended mutual funds.

As things currently stand, ETFs are solely index-based. Since indices are constantly repriced throughout the day, this allows for the intraday trading of ETFs, which is what makes them so popular.

As you may know, actively managed mutual funds are only priced once the market is closed. Technologically, however, there's no reason that needs to remain the case; actively managed funds could easily be valued throughout the day just like an index and its corresponding ETF.

It's only a matter of time before this becomes a reality, which means ETFs of actively managed portfolios are almost certainly in our future.

Not convinced? Consider this: Three months ago, Profunds, which along with Rydex Funds is known for mutual funds that are leveraged and/or negatively correlated to popular indices, launched the first leveraged ETFs.

Because these ETFs were exact replicas of several of its existing open-end mutual funds, these filings showed that Profunds is willing to potentially cannibalize sales in its existing open-end funds.

Why would Profunds make such a decision? Simple: It sees where the future lies.

Just think, why would investors buy a fund vehicle that prices only once a day when they could get the exact same portfolio that's liquid any time the market is open?

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