Too Big to Ignore

The WSJ featured an interesting article with the intriguing title “Too Big To Ignore.” Let’s look at some highlights:

Not long ago, the mention of another new exchange-traded fund was enough to make investors and industry experts roll their eyes. With most of the newcomers pegged to increasingly esoteric measures—everything from the Swedish krona to cancer treatments—most investors stuck with older ETFs that tracked traditional indexes.

Now a handful of major mutual-fund firms are jumping into the field with products that go back to the original iteration of ETFs—straightforward index products.

This summer, Pacific Investment Management Co. launched two bond ETFs—one will track the Merrill Lynch 1-3 Year U.S. Treasury Index, the other will track Merrill’s 1-5 Year U.S. Inflation-Linked Treasury Index—and it has seven more bond-index ETFs in registration. Charles Schwab Corp. has registered a large-cap international-stock fund, a small-cap international-stock fund and an emerging-markets stock fund, all tracking FTSE indexes. Old Mutual PLC, a global financial-services firm based in South Africa, has five funds in registration that also track FTSE international-stock indexes. And Russell Investments has announced it wants to explore the ETF market.

A Tantalizing Market

Why are the big names piling into ETFs? Simple: It’s a $604 billion market, as measured by total ETF assets, and growing fast. According to data from the National Stock Exchange, an electronic exchange that tracks sales and growth of exchange-traded funds, ETFs gathered more than $54 billion in new assets through July, up 64% from the same period a year ago.

For investors, the flood of big, established new players into the ETF business is unquestionably good, says Rick Ferri, a Michigan investment adviser and author of “The ETF Book.” The competition may force fees lower, and “there’s no cost to investors for, say, Schwab to go out and do this.”

Mr. Ferri adds, though, that there’s no hurry to invest in the newest products. For now, it’s better to wait and see, he advises, and to stick with proven ETF products that have scale and liquidity on their side.

[Emphasis added]

ETFs are the hottest development of the past few years and a viable alternative to many mutual funds. They’re growing rapidly, and every major player wants to get a piece of the pie, so to speak, when it comes to management fees.

I agree that more competition will lower fees in general which, eventually, will affect mutual funds as well. However, just because there are lots of ETF choices, does not mean they are all good. I am in favor of sticking to proven products and letting newcomers show me some price action over a year’s period before I would seriously consider them.

The ETF Master List in my StatSheet still contains ETFs that are very tiny with not much volume, which I will gradually remove. My new rule will be not to feature any ETF unless it has at least $50 million in assets.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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