The Omni Intelligencer

Sell your house faster for more. auction-style-property-sale
  Wednesday, June 29, 2016  Home > Money > Finance > Investment > The Number of ETFs Is Exploding
Follow us on Twitter
Every Dollar Helps
Donate using PayPal
Amount:

The Number of ETFs Is Exploding

| More
As I watch the exchange-traded fund (ETF) universe grow, I keep having flashbacks to the huge increase in the number of mutual funds in the 1990s.

Back then everyone wanted to own large cap growth funds. You could take your pick of hundreds in the category. A few were really good, a few really bad, and most were average. I saw frustrated investors simply give up trying to choose and throw their money at whatever was convenient. Usually it didn't work out so well.

The good news is that the ETF structure should allow us to avoid some of the ill effects of the mutual fund boom.

As Americans, we're all about freedom. We choose our cars from a showroom, our food from a menu, and our flowers from a nursery. We don't like being forced to take whatever happens to be available.

No one likes having too many choices.
It's possible, though, to have too many choices. At some point we get overwhelmed and paralyzed. Then we do nothing — even when we should. This is as true with investing as with everything else and can lead to ...

ETF OverloadNo one likes having too many choices.

Now we're approaching the same crossroads in the ETF era. According to my data, at the end of June there were 914 exchange-traded funds and 95 exchange-traded notes available to U.S. investors. That's well over 1,000 choices with more coming to market every week.

Want large cap growth? You have to pick from 13 ETFs now on the market, not counting leveraged and inverse ones. Looking to bet on a sector — technology, for example? More than 30 technology-related ETFs are now available!

Do we need so many ETFs? Yes and no.

Many are duplicative or have a lot of overlap in their portfolio holdings. The big sponsors all want to stay competitive by covering every niche.

To some degree, this is a good thing. Competition leads to better products, more efficiency, and lower costs for everyone. I always appreciate having choices when I make investment decisions.

On the other hand, as the market is sliced into smaller and smaller pieces, investor interest in some segments is simply not enough to support a half-dozen different ETFs.

A few big sponsors dominate the ETF business.

So what happens is that the biggest firms — the ones with well-known brand names and big marketing budgets — tend to dominate the menu. That's too bad; there are some smaller upstart companies that deserve a break. Yet it's a fact of life.

However, there is a problem when investing in the smaller ETFs ...

 

The ETF Liquidity Trap

As people who are used to investing in mutual funds switch to ETFs, many run into something they never had to worry about before: Liquidity.

No-load mutual funds can typically be bought and sold at the daily net asset value, or NAV. ETFs are bought and sold on an exchange and their price changes throughout the day.

There are really two prices: The "ask" price, which is what you will pay to buy the shares with a market order; and the "bid" price, which is what you will receive for selling your shares with a market order. The difference between these two prices is what is known as the "spread."

Here's the problem:

The largest 100 or so ETFs typically trade with just a one or two-cent spread. However, small and thinly traded ETFs might have spreads of 10 cents, 20 cents, or more. If, for instance, the share price is around $20, you could lose nearly one percent just buying and selling shares even while the price remains steady.

What this means is that you can't just look at an ETF's past performance when deciding whether to jump in. You also need to consider its size, trading volume, and institutional involvement.

Here is a quick example:

Say you want to invest in the real estate sector. Someone tells you that PowerShares Active U.S. Real Estate Fund (PSR) has done very well, up 52.7 percent in the last twelve months. You do a little checking and find out that PSR edged out iShares Dow Jones U.S. Real Estate (IYR), which gained 51.2 percent in the same period.

Dig a little deeper. It turns out that IYR has assets of more than $2,440 million ($2.4 billion), while PSR only has about $4 million.

Look at the trading activity, too. Average daily dollar volume is more than $900 million for IYR. For PSR, the typical day only generates about $0.2 million in trading activity.

Which do you choose? I know what I would do. Performance in the two ETFs is very similar, but IYR is far bigger and way more actively traded. There are no guarantees, of course. Nevertheless, IYR gives me more assurance I can buy or sell efficiently and at a fair price.

As you can see, it's not hard to lose an extra percent or two on each entry and exit in an illiquid ETF. This can quickly eliminate any performance advantage you think you're getting from a small, unknown fund.

The example above is not just cherry-picking. I could name many other ETFs that look like they have good results but are even smaller and less popular.

I always consider these factors when I'm looking for ETFs. And I try to avoid the small, thinly-traded ones. Should you do likewise?

In my opinion, most people are better off sticking to the beaten path. Once you decide to move into a particular sector or market category, do a little homework and find out which ETFs have the best liquidity in the group.

However, if you have access to reliable, real-time market data and don't mind "working" your orders to get the best prices, you can probably make good use of some smaller ETFs. This takes some time and specialized knowledge.

Either way, ETFs are one of the most useful investment tools to come along in decades. Learn about them, know them, and consider using them!

Best wishes,

Ron

P.S. My just-released ETF Field Guide includes everything you need to get on the right track for profitable ETF investing. And the companion proprietary ETF Shopper's Handbook gives you easy-to-understand data so you can find the cream of the cream among more than 1,000 ETFs and ETNs. You don't want to be without this one-of-a kind resource if you invest in ETFs. Click here to learn more.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


Sell your house faster for more. auction-style-property-sale
| More
 

Current Headlines - Finance

  • Stagecoach annual earnings boosted by rail unit 29 Jun 2016 | 1:40 am

    Britain's Stagecoach reported a rise in adjusted annual earnings per share on Wednesday led by higher revenue from its rail operations and said that it would aim to stimulate growth. Adjusted earnings per share rose to 27.7 pence for the year to April 30 from 26.7 pence. Stagecoach also said on Wednesday that it had agreed to sell the retail operations of its megabus business in Europe.

  • Suzuki Motors says Brexit to have 'major' impact on earnings 29 Jun 2016 | 1:24 am

    Logo of Suzuki Motors is displayed at the 44th Tokyo Motor Show in Tokyo, JapanSuzuki Motor Corp on Wednesday said currency market volatility after Britain voted to exit the European Union would likely have a "major" impact on earnings, and that it would offset the impact by cutting costs and local procurement. Suzuki Motors, which sells nearly half of its vehicles in India, said volatility in India's rupee and the euro would have a negative impact on the Japanese automaker. Suzuki's overseas production facilities include plants in India and EU member state Hungary.


  • Congressional watchdog expands probe of lax Wall Street oversight 28 Jun 2016 | 5:12 pm

    A Wall Street sign is seen in Lower Manhattan in New YorkA U.S. congressional watchdog said on Tuesday it has formally added three agencies to its investigation into whether government regulators are too soft on the banks they are meant to police. The review, requested last October, is the first by an outside agency into the perception that financial regulators are "captured" by and too deferential toward the bankers they supervise, so that Wall Street benefits at the public's expense. Lawrance Evans, director of the GAO's financial markets and community investment division, said in an email on Tuesday that the probe would include the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the National Credit Union Administration (NCUA).


  • Wall Street bounces back after two-day Brexit rout 28 Jun 2016 | 3:29 pm

    A trader works on the floor of the NYSEWall Street bounced back on Tuesday, recouping some recent losses, as investors sought cheap assets after a two-day equities rout sparked by Britain's decision to leave the European Union. U.S. indexes joined stock markets around the world in the rebound after global equity markets had shed $3 trillion in value in the two days following Britain's shock vote, according to S&P Dow Jones Indices. "So I think you’ve seen a bit of bargain-hunting." The Dow Jones industrial average rose 269.48 points, or 1.57 percent, to 17,409.72, the S&P 500 gained 35.55 points, or 1.78 percent, to 2,036.09 and the Nasdaq Composite added 97.42 points, or 2.12 percent, to 4,691.87.


  • S&P: No other EU downgrades post-Brexit, will look at UK banks 28 Jun 2016 | 9:07 am

    The Canary Wharf financial district is seen in east LondonStandard and Poor's said on Tuesday it had no plans to downgrade any other EU country in the wake of Britain's Brexit vote and that it will decide if any UK banks ratings should be cut in the coming weeks. "This does not lead to mechanical changes (in bank ratings)," S&P banking sector analyst Giles Edwards said on a webcast. S&P chopped the UK's credit rating by two notches to AA and kept it on a 'negative outlook' on Monday in the wake of last week's vote to leave the European Union.


  • Obama uses Hiroshima visit as opportunity to urge no nukes 27 May 2016 | 2:00 pm

    Obama uses Hiroshima visit as opportunity to urge no nukesHIROSHIMA, Japan (AP) — With an unflinching look back at a painful history, President Barack Obama stood on the hallowed ground of Hiroshima on Friday and declared it a fitting place to summon people everywhere to embrace the vision of a world without nuclear weapons.


  • Senate sleuths focus on ex-State Department aide in Clinton email ‘cover-up’ 27 May 2016 | 1:32 pm

    Senate sleuths focus on ex-State Department aide in Clinton email ‘cover-up’As Hillary Clinton seeks to rebound from a highly critical report from the State Department’s inspector general, Senate investigators and a conservative group are zeroing in on newly revealed evidence about the activities of a now retired State Department computer specialist in orchestrating what they charge was a “cover-up” of the former secretary of state’s email practices. The role of John Bentel, whose identity as a key figure in the email probes was first reported by Yahoo News on Wednesday, is expected to be one focus of questioning today when Clinton’s former chief of staff, Cheryl Mills, is deposed in a lawsuit brought by Judicial Watch over the State Department’s handling of Freedom of Information Act requests relating to Clinton’s emails, according to a source close to the case.


  • G7 told to act on antibiotics as dreaded superbug hits U.S. 27 May 2016 | 10:39 am

    Colonies of E. coli bacteria are seen in a microscopic image courtesy of the CDCBy Kylie MacLellan and Ben Hirschler ISE-SHIMA, Japan/LONDON (Reuters) - Britain told the G7 industrial powers on Friday to do more to fight killer superbugs as the United States reported the first case in the country of a patient with bacteria resistant to a last-resort antibiotic. U.S. scientists said the infection in a 49-year-old Pennsylvania woman "heralds the emergence of truly pan-drug resistant bacteria" because it could not be controlled even by colistin, an antibiotic reserved for "nightmare" bugs. In Japan, British Prime Minister David Cameron said leading countries needed to tackle resistance by reducing the use of antibiotics and rewarding drug companies for developing new medicines.


  • Statue of Liberty, other world sites threatened by climate change, says U.N. 27 May 2016 | 10:29 am

    Statue of Liberty, other world sites threatened by climate change, says U.N.The Statue of Liberty is seen in New York harbor. Climate change might dampen Lady Liberty’s glow, according to experts. The United Nations released a report Thursday saying 31 natural and cultural World Heritage sites in 29 countries are vulnerable to the effects of climate change: rising temperatures, rising sea levels, intensifying storms, longer droughts and so on.


  • 19 people rescued from Kentucky cave 31 Dec 1969 | 6:00 pm


The fastest and best way to sell real estate.
auction-style-property-sale