Are There Too Many ETFs?

The number of ETFs has jumped 11% in a year, causing Don Dion to wonder whether the industry is growing too quickly for its own good.
Author:
Publish date:

NEW YORK (

TheStreet

) -- The ETF industry continues to expand rapidly, as new products hit the market and issuers file for additional funds.

According to recent data from the National Stock Exchange, the number of listed ETFs has jumped 11 percent from 716 in October of 2008 to 796 in October of 2009.

Issuers have begun to target increasingly narrow regions of the market, looking to claim first-mover status. Investors can now buy the

Oklahoma ETF

(OOK)

or the

Market Vectors Brazil Small-Cap ETF

(BRF) - Get Report

, both launched in 2009, and access these specific locales.

Investor interest in ETFs seems only outmatched by the eagerness of issuers to launch new funds, and it is important to ask if we have come too far too fast.

Assets are flowing into many different regions of the ETF marketplace, but much of the money is concentrated in top funds. October NSX data states that more than $707 billion is invested in ETF funds.

Of that amount, more than $268 billion is invested in the top 10 largest ETFs. This group includes broad index funds like the

SPDR S&P 500

(SPY) - Get Report

and

iShares S&P 500

(IVV) - Get Report

, commodity funds like

SPDR Gold

(GLD) - Get Report

, and emerging market funds like the

iShares MSCI-Emerging Markets

(EEM) - Get Report

and

Vanguard MSCI Emerging Markets

(VWO) - Get Report

.

While the list of top funds confirms the dominance of issuers like State Street and iShares, it also underscores the importance of competition in the industry. EEM, which was launched in April of 2003, was considered the dominant emerging markets ETF in the wake of its release.

VWO, however, launched by Vanguard in March of 2005, is now a serious competitor in the emerging markets space. The ascendance of VWO's assets is a testament to the willingness of ETF investors to look for a bargain. While EEM has a 0.72% expense ratio, VWO charges just 0.27%.

This phenomenon is important to remember as

new issuers

like

Schwab

(SCHW) - Get Report

enter the market with funds that sound familiar. Even though new funds may seem redundant, the competition has helped to push down costs for individual investors.

ETFs also thin their ranks through

a powerful self-selection process

. Funds that are not able to garner sustainable investor interest

fold

over time.

This process has been especially evident in the universe of exchange-traded notes. These products, which track debt instead of equity, were once heralded as the new ETFs. From October 2008 to October 2009, however, the total number of listed ETNs has dropped from 90 to 84.

Rather than focusing on the number of ETFs, investors should take care in choosing quality products for their objectives. Keep an eye out for portfolio balance and volume. The new influx of ETF products will be tempered by popularity, while helping to bring new ideas and lower prices to the market.

-- Written by Don Dion in Willliamstown, Mass.

At the time of publication, Dion did not have any positions in the funds mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.