An article by my colleague Jen Ryan on
questions whether there are
too many ETFs, with detailed quotes from the usual suspects in the mutual fund industry.
Exploring the topic is worthwhile, but I'm not sure the opinions from the experts are.
This might be all you need to know:
market cap = $397 billion
All assets in U.S. ETFs = $363 billion
As Jen points out, $106 billion of the total is in the three largest ETFs, leaving $257 billion allocated to the rest of the industry.
That dollar amount does not represent a frenzy of buying on the part of "stupid" individual investors.
It is true that a lot of ETFs have come to the market of late and it is very likely that the rate of new listings will accelerate.
There is no question that some of them will be useless. This will be evidenced by a lack of money flowing into them, which will eventually force a closure, like the SPDR O-Strip ETF that was shuttered on Sept. 13.
This is just capitalism at work, as investors vote with their dollars.
Star Light, Star Not So Bright
Whenever I read an article that takes a swipe at ETFs, there will invariably be a negative quote or two from someone at Morningstar. It was very slow to acknowledge that any ETFs had investment merit.
Anytime there is something new in the industry, it can be counted on to be one of the naysayers, so I take what Morningstar says with a huge grain of salt. If I were more of a cynic, I might think it had some sort of agenda in talking down new ideas that don't involve open-ended funds.
Recently, ETF Securities listed almost 30 ETFs on the London Stock Exchange that track individual commodity prices. They provide easy access to commodities through brokerage accounts without having to deal with contract expirations or leverage.
Does the typical do-it-yourself investor need an ETF that tracks the price of lean hogs? Not likely.
It is very unlikely that you need most of the new ETFs, but that they exist is not a strike against them. It is not a stretch to say that a commodity ETF besides one that owns a precious metal could have a place in a diversified portfolio.
If there will be any demand for these exotic-sounding ETFs, it probably will come from institutional investors -- the managers of the mutual funds you own in your 401k.
ETFs Don't Take Risks, People Do
Anytime ETFs that invest in something different come out, they will get slammed in much the same way. The backward thinkers will say that the new funds take too much risk, investors will chase hot returns, individuals should stay away.
Taking too much risk, chasing hot returns -- haven't investors been doing that already with OEFs and stocks? Shuttering the ETF industry will not deter people who want to speculate from speculating.
It is a certainty that some investors will misuse ETFs in spectacular fashion, but this is a flaw in human behavior, not investment products.
ETFs are merely tools. In some instances they are the best way to access certain markets; many times they are not the best tools out there. I believe they give do-it-yourself investors the chance to get the same results as stocks but with less risk, which is why I write about them.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, Ariz., and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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