ETF Firms Get Hip to Marketing

Companies that sell exchange-traded funds don't usually claim to possess knowledge of all things relating to securities markets, as most ETFs represent indexes whose holdings don't change often.

But some ETF management firms have not ignored the basics of marketing, especially the core stratagems of product pricing.

ETF sponsor Claymore Securities is an example. The Claymore/Morningstar Service Super Sector ETF(MZO Quote) is among nine ETFs most recently graded by TheStreet.com Ratings, and it's barely a year old. With recent total net assets of $3.7 million, it is still relatively small. As a result, the fund's fixed management and administrative expenses amount to more than 1.5% of assets.

Since burdening investors with an expense ratio of more than 1.5% places MZO at what marketing professionals would euphemize as a "cost disadvantage," Claymore has capped the fund's expense ratio at a competitive 0.40%. This positions the fund's fees in line with many other ETFs, allowing it to attract sufficient assets to ultimately spread its true expenses over a broader base.

For a fund like MZO, with a portfolio made up of common blue chips such as Johnson & Johnson(JNJ Quote), Wal-Mart Stores(WMT Quote) and Bank of America(BAC Quote), limiting expenses to allow for future growth is "Marketing 101."

What's surprising is that a number of ETF managers are trying to sidestep this basic relationship between pricing and demand.

All three Claymore entries, including the First Trust funds and the Market Vectors Nuclear Fund ETF(NLR Quote) have set a ceiling for their effective expense ratios to maintain price competitiveness. All the funds on the list only recently celebrated their first birthdays.