The Omni Intelligencer

Sell your house faster for more. auction-style-property-sale
  Sunday, August 28, 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

  • 2 brothers charged in shooting of Wade's cousin 28 Aug 2016 | 2:05 pm

    Two men charged in shooting of Dwyane Wade’s cousin. (AP)Two brothers have been charged with first-degree murder of Nykea Aldridge, who was walking to register her kids for school.


  • Did building code lapses boost Italy quake toll? 28 Aug 2016 | 1:01 pm

    A rescuer and a sniffer dog atop rubble in Amatrice, in central Italy, in Amatrice, in central Italy, in Aug. 27. (Antonio Calanni/AP)As the death toll rises, investigators focus on construction code enforcement at recently renovated sites.


  • Dallas police squelch critics after attack 28 Aug 2016 | 12:45 pm

    Police officers arrive at a funeral service for slain Dallas Area Rapid Transit police officer Brent Thompson. (Justin Sullivan/Getty Images)Nearly two months after the sniper attack on officers, the department has moved to silence questions.


  • Costs of N.J. bridge scandal still adding up 28 Aug 2016 | 12:01 pm

    New Jersey Gov. Chris Christie enters the Borough Hall in Fort Lee to apologize to Mayor Mark Sokolich. (Spencer Platt/Getty Images)Nearly three years after gridlock was allegedly created to punish a mayor for not endorsing Gov. Chris Christie, repercussions linger.


  • RNC chair: 'I don't speak for Trump' 28 Aug 2016 | 11:35 am

    Reince Priebus: "I don't speak for Trump." (AP)Reince Priebus said that if people want to know the specifics of Trump’s immigration policy, they'll have to ask the candidate himself.


  • Fed could use reserves payments to stimulate U.S. economy - paper 27 Aug 2016 | 10:12 am

    The Federal Reserve Building in WashingtonThe Federal Reserve could push banks to lend more by paying Wall Street smaller returns on money stashed at the U.S. central bank when inflation is low, according to an academic paper presented on Saturday. The proposal was one of several discussed at an international gathering of central bankers who are looking for ways to stimulate economies even after they have cut interest rates to near zero and flooded banks with money. In his paper, economist Ricardo Reis put forward a new way for the Fed to pay banks returns on the money they keep at the central bank, a tool that could potentially put the Fed's goal of keeping inflation at 2 percent on autopilot.


  • Jobs data to be a big deal for record-high stocks 27 Aug 2016 | 5:11 am

    Job seekers fill out applications during 11th annual Skid Row Career Fair the Los Angeles Mission in Los AngelesWall Street will fixate on a wave of U.S. economic data next week, crested by payrolls data on Friday that could sway expectations about the timing of future interest rate hikes and spark volatility in record-high stock prices. Fresh data about employment and consumer confidence could help investors solidify expectations for a December interest rate hike from the U.S. Federal Reserve, or lend weight to a minority of strategists predicting a rate rise as early as next month. Fed Chair Janet Yellen said the case for a rate hike is strengthening, but she left open the timing of what would be the first increase since December 2015.


  • Caesars must face $11 billion in lawsuits: U.S. judge 26 Aug 2016 | 5:34 pm

    Las Vegas Strip casinos are seen from the 550 foot-tall (167.6 m) High Roller observation wheel, the tallest in the world, in Las VegasCaesars Entertainment Corp must face lawsuits from bondholders seeking some $11 billion in claims, a U.S. judge ruled on Friday in a decision the casino company had warned could plunge it into bankruptcy alongside its operating unit. Caesars Entertainment Operating Co (CEOC), which filed for Chapter 11 protection in January 2015, was asking for a third court shield from lawsuits against its parent to protect a multibillion-dollar contribution to its reorganization plan. The high-stakes CEOC bankruptcy has been plagued by a complex web of litigation pitting some of the most aggressive investors on Wall Street against each other.


  • Wall Street slips in wake of comments by top Fed officials 26 Aug 2016 | 3:32 pm

    Traders work on the floor of the New York Stock Exchange (NYSE) in New York CityU.S. stocks ended modestly lower after a volatile session on Friday, having bounced between gains and losses as investors wrestled with the likely timing of a U.S. interest rate hike following comments from top Federal Reserve officials. The S&P 500 rose after Fed Chair Janet Yellen said the case for raising rates had strengthened but did not indicate when the Fed would act. Yellen told a gathering of central bankers from around the world in Jackson Hole, Wyoming, the U.S. economy was nearing the central bank’s goals of maximum employment and price stability but that future hikes should be “gradual”.


  • Clinton’s Coziness With Silicon Valley: More Troubling Than Her Wall Street Ties 26 Aug 2016 | 5:15 am

    Clinton’s Coziness With Silicon Valley: More Troubling Than Her Wall Street TiesThe wealth of Hollywood has historically been a magnet for Democratic politicians, and it remains so; Hillary Clinton spent two days draining the pocketbooks of Justin Timberlake and other luminaries this ...


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