The Omni Intelligencer

Sell your house faster for more. auction-style-property-sale
  Friday, April 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

  • Lakers announce Luke Walton has been hired as head coach 29 Apr 2016 | 9:35 pm

    Houston Rockets v Golden State Warriors - Game FiveWalton went 39-4 as the Golden State Warriors' interim head coach to start the season and was considered one of the top candidates on the market.


  • With weak earnings in tow, focus turns to jobs data 29 Apr 2016 | 8:21 pm

    Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New YorkComing off a barrage of flimsy company earnings reports that included Apple's first revenue drop in 13 years, investors will turn to April jobs data for signs of budding resilience or further weakening in the second quarter. U.S. nonfarm payrolls, unemployment and wages data are due Friday May 6, when the economy is expected to have added 200,000 jobs in April, with the unemployment rate unchanged at 5 percent and a wage increase of 0.3 percent, according to Reuters data. Unlike in recent months, where weak jobs numbers were counted on to stave off another Federal Reserve interest rate hike, investors are now itching for better-than-expected employment data to indicate a stronger next earnings season, analysts said.


  • US growth worries cloud global stock markets 29 Apr 2016 | 6:02 pm

    Europe's main stock markets were lower, despite official data showing that growth in the eurozone strengthened far beyond expectations in the first quarter, as traders focused on deflation worries across the single currency blocTraders dumped retail US stocks Friday, with giant Walmart losing 3.0 percent, after a weak report on American consumer spending added to worries about the strength of the economy. Wall Street's losses -- the Dow fell 0.3 percent and the Nasdaq dropped 0.6 percent -- capped a day in which nearly all leading markets tumbled. While the Tokyo market was closed, Hong Kong shares sank 1.5 percent, Frankfurt fell 2.7 percent, and London 1.3 percent.


  • Watch the 2016 NFL draft on Yahoo Sports 29 Apr 2016 | 5:57 pm

    NFL DraftFollow all of the action from Chicago as we stream the NFL Network's draft coverage


  • Cruz gets Indiana governor's endorsement 29 Apr 2016 | 5:04 pm

    Yahoo News Live: Trump vs. Cruz: Will Indiana Governor Mike Pence’s endorsement matter?INDIANAPOLIS (AP) — In a setback for Donald Trump, Indiana's governor endorsed the front-runner's chief rival, Ted Cruz, on Friday, injecting new drama into the state's critical Republican primary contest just days before voters head to the polls.


  • Protests force Trump into a ditch, en route to make his California pitch 29 Apr 2016 | 4:34 pm

    Protests force Trump into a ditch, en route to make his California pitchBURLINGAME, Calif.—A little over a month before California’s pivotal Republican presidential primary, Donald Trump began his official wooing of party delegates Friday, headlining a kickoff lunch at the state’s annual GOP convention. But Trump’s appearance was nearly derailed by massive protests outside the Hyatt Regency near the San Francisco airport, where the convention is being held. The protests blocked Trump’s motorcade route, forcing the candidate and his Secret Service detail to abandon their vehicles on a nearby highway, jump a barricade wall and cross a ditch to get to the hotel’s back entrance—movements that were captured by television news helicopters.


  • Wall Street falls as earnings weigh; Dow, S&P up for month 29 Apr 2016 | 3:42 pm

    Traders work on the floor of the NYSEBy Rodrigo Campos NEW YORK (Reuters) - U.S. stocks posted their largest weekly drop in more than two months on Friday as earnings reports continued to weigh, but the S&P 500 and Dow managed to close up for April after strong showings mid-month. Company results once more gave the market direction as a 9 percent decline in Gilead Sciences shares weighed the most on both the S&P and the Nasdaq Composite. Apple and Gilead, alongside Corning , Goodyear and Xerox are among the companies that reported earnings this week and are closing them with double-digit declines in their stock.


  • Yen posts biggest weekly gain since 2008, stocks slip 29 Apr 2016 | 3:22 pm

    Japanese 10,000 yen notes line up in Tokyo, in this picture illustrationBy Herbert Lash NEW YORK (Reuters) - The yen hit an 18-month high on Friday as investors bet the Bank of Japan might be done adding stimulus to the economy, while stocks in Europe and on Wall Street headed lower as earnings disappointed. The yen posted its biggest weekly gain since the 2008 financial crisis, also spurred by a weak reading of U.S. economic growth in the first quarter on Thursday and the Federal Reserve's cautious tone this week. The yen has gained 3 percent since Thursday when the BOJ decided to hold monetary policy steady in the face of soft global demand and the yen's recent sharp rise.


  • Apple's stock suffers worst week since 2013 29 Apr 2016 | 3:16 pm

    The Apple logo is pictured behind the clock at Grand Central Terminal in the Manhattan borough of New YorkBy Noel Randewich SAN FRANCISCO (Reuters) - Apple Inc on Friday ended its worst week on the stock market since 2013 as worries festered about a slowdown in iPhone sales and after influential shareholder Carl Icahn revealed he sold his entire stake. Shares of Apple, a mainstay of many Wall Street portfolios and the largest component of the Standard & Poor's 500 index, have dropped 11 percent in the past five sessions. Confidence in the Cupertino, California company has been shaken since posting its first-ever quarterly decline in iPhone sales and first revenue drop in 13 years on Tuesday, although Apple investors pointed to the stock's relatively low valuation as a key reason to hold onto the stock.


  • 16 blamed for mistakes in deadly US attack on Afghan clinic 29 Apr 2016 | 3:12 pm

    Army Gen. Joseph Votel, Commander of U.S. Central Command, briefs reporters on the release of the investigation into the U.S. airstrike on the Doctors With Borders trauma center in Kunduz, Afghanistan, Friday, April 29, 2016, at the Pentagon. (AP Photo/Molly Riley)WASHINGTON (AP) — Human error, violations of combat rules and untimely equipment failures led to the mistaken U.S. aerial attack on a charity-run hospital in Afghanistan last fall that killed 42 people, a senior American general said Friday. Investigators called the attack a "disproportional response to a threat that didn't exist."


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