The Omni Intelligencer

Sell your house faster for more. auction-style-property-sale
  Friday, November 27, 2015  Home > Money > Finance > Investment > The Number of ETFs Is Exploding
Follow us on Twitter
Every Dollar Helps
Donate using PayPal

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,


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

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

Current Headlines - Finance

  • Police: 3 officers injured, shooter contained in Colorado 27 Nov 2015 | 2:19 pm

    Planned Parenthood at 3480 Centennial Boulevard, Colorado Springs, CO where police are engaging an active shooter. (via Google Maps)COLORADO SPRINGS, Colo. (AP) — The latest on the shooting near Planned Parenthood clinic in Colorado. (All times local)

  • France honors attack victims in city subdued by mourning 27 Nov 2015 | 1:26 pm

    French President Francois Hollande stands at attention as he leads a ceremony to pay a national homage to the victims of the Paris attacks at Les Invalides monument in ParisA subdued France paid homage Friday to those killed two weeks ago in the attacks that gripped Paris in fear and mourning, honoring each of the 130 dead by name as the president pledged to “destroy the ...

  • Black Friday around the country 27 Nov 2015 | 1:16 pm

    People look at merchandise while holiday shopping at Best Buy on Thursday, Nov. 26, 2015, in Panama City, Fla. Early numbers aren’t out yet on how many shoppers headed to stores on Thanksgiving, but it’s expected that more than three times the number of people will venture out to shop on the day after the holiday known as Black Friday. (Patti Blake/News Herald via AP) MANDATORY CREDITShoppers began feasting on deals on Thanksgiving, but just how hungry they'll remain is yet to be seen. Analysts have questioned whether Black Friday is losing its cachet as retailers have pushed opening ...

  • Wall Street ends flat; Disney, retailers dip on sales worries 27 Nov 2015 | 12:58 pm

    Traders work on the floor of the New York Stock ExchangeU.S. stock indexes ended little changed in light trading on Friday, with consumer stocks falling as investors fretted over early reports on the U.S. holiday shopping season and Disney's subscriber losses weighed on the market. U.S. stock markets closed three hours earlier following the Thanksgiving holiday on Thursday, with many traders taking the day off. "We're going to get today over with and hit the ground running next week," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago.

  • SALLIE KRAWCHECK: My advice for women wanting to break into Wall Street or Silicon Valley 27 Nov 2015 | 9:02 am

    SALLIE KRAWCHECK: My advice for women wanting to break into Wall Street or Silicon ValleyReuters Sallie Krawcheck: “Network, network, network, network.” Networking … Continued The post SALLIE KRAWCHECK: My advice for women wanting to break into Wall Street or Silicon Valley appeared first on Business Insider.

  • Moody's, S&P ratings on South African power firm Eskom unchanged 27 Nov 2015 | 8:20 am

    Moody's sign on 7 World Trade Center tower in New YorkRatings firms Moody's and Standard and Poor's kept South African utility Eskom's credit status unchanged, saying recent cash injections by government had eased a funding crunch, the power firm said on Friday. Moody's affirmed the Ba1, or speculative grade, rating of state-owned Eskom's [ESCJ.UL] senior unsecured credit rating with a stable outlook, while S&P also kept the power utility's local and foreign currency corporate credit rating unchanged at BB+, with a negative outlook. The state has provided Eskom with 10 billion rand ($699 million) in equity, with an additional 13 billion rand expected by March 2016, the company said on Wednesday.

  • A Christmas Present to Wall Street Could Shut Down the Government 27 Nov 2015 | 8:00 am

    A Christmas Present to Wall Street Could Shut Down the GovernmentAdd attempts to roll back Wall Street reform to the list of things that might cause a government shutdown next month, when Congress comes to grips with the need to pass an omnibus government spending bill before a December 11 deadline. Treasury Secretary Jack Lew on Wednesday wrote an op-ed for Bloomberg View in which he said that he would advise the president to veto any spending bill that included significant rollbacks to the Dodd-Frank Wall Street reform law that was passed in 2010, following the financial crisis that helped tip the country into the Great Recession. “Wall Street reform is working,” Lew wrote.

  • GLOBAL MARKETS-Black Friday for China stocks but metals not so heavy 27 Nov 2015 | 7:22 am

    The Shanghai Composite index and the CSI300 both saw their biggest one-day drops in more than three months and ensured it was set to be a subdued post- Thanksgiving session for Wall Street. "There is clearly a risk that China will try and devalue the currency further," said Ankit Gheedia, equity and derivative strategist at BNP Paribas (Xetra: 887771 - news) . "(However) Europe is still trading on the ECB next week, which is why the market is relatively resilient," he said referring to expectations of another round of stimulus.

  • Obama's legacy on climate is at stake in Paris talks 31 Dec 1969 | 6:00 pm

    Obama has been laying the groundwork for years ahead of the U.N. climate change summit.

  • Saudi king showered Obamas with $1.3 million in gifts in 2014 31 Dec 1969 | 6:00 pm

    The first thing to know is that these gifts aren’t bribes.

The fastest and best way to sell real estate.