The Omni Intelligencer

Sell your house faster for more. auction-style-property-sale
  Saturday, May 30, 2015  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

  • O'Malley readying presidential announcement in Baltimore 30 May 2015 | 2:26 am

    Former Maryland Gov. Martin O'Malley greets local residents before speaking at a fundraiser in April in Indianola, Iowa. O'Malley has spent months investing in Iowa, aiming to repeat the trick pulled by Barack Obama in 2008, when the then-underdog upstart challenger to favorite Hillary Rodham Clinton won the state's caucuses and began his march to the Democratic presidential nomination. (AP Photo/Charlie Neibergall, File)WASHINGTON (AP) — Former Maryland Gov. Martin O'Malley is ready to enter the Democratic presidential campaign, mounting a longshot challenge to Hillary Rodham Clinton for the party's nomination in 2016.


  • Presidential disaster declaration signed after Texas storms kill 21 30 May 2015 | 1:23 am

    Amy Gilmour a volunteer from San Antonio Texas walks past a pile of debris which included parts of destroyed homes that amassed when the Blanco River flooded during the Memorial Day weekend rains in Wimberley TexasBy Lisa Maria Garza and Jim Forsyth DALLAS (Reuters) - U.S. President Barack Obama signed a disaster declaration late on Friday for areas in Texas hammered by severe weather that killed at least 21 people, caused massive flooding and prompted evacuations this week. Storms that battered North Texas on Thursday and Friday added more runoff to swollen rivers and prompted hundreds of calls for help in Dallas, where some areas saw up to seven inches (17.8 cm) of rain. "Communities across the State of Texas have experienced devastating destruction, injury and – most tragically – loss of life due to the major and unceasing severe weather system that has been impacting our state for weeks," said Governor Greg Abbott, who has declared 70 counties disaster areas.


  • U.S. military orders review as anthrax mishap widens 30 May 2015 | 12:31 am

    Spores from the Sterne strain of anthrax bacteria (Bacillus anthracis) are pictured in this handout scanning electron micrographBy Phil Stewart WASHINGTON (Reuters) - The U.S. military said on Friday it discovered even more suspected shipments of live anthrax than previously thought, both in the United States and abroad, and ordered a sweeping review of practices meant to inactivate the bacteria. The Pentagon said a total of 11 states, two more than it first acknowledged, received "suspect samples," as did Australia and South Korea. It had previously only identified a foreign shipment to a U.S. air base south of Seoul.


  • Wall Street Weekahead: Strong sales could shift Ford, GM to higher gear 29 May 2015 | 11:08 pm

    A Wall Street sign is pictured in front of the New York Stock Exchange, open during Winter Storm Juno, in the Manhattan borough of New YorkBy Ryan Vlastelica and Sinead Carew NEW YORK (Reuters) - Shares of U.S. automakers may finally be able to accelerate. "This is going to be one of the best months ever," said David Kudla, chief investment strategist of Mainstay Capital Management in Grand Blanc, Michigan. Weak auto results contributed to flat overall retail sales in April, but May is expected to represent a rebound.


  • Sources: Hastert engaged in sexual misconduct as a teacher 29 May 2015 | 5:35 pm

    Dennis Hastert Allegedly Engaged in Sexual Misconduct With Male Individual During Time as Teacher, Sources SayThe alleged "misconduct" referenced in the indictment of former House Speaker Dennis Hastert is of a sexual nature involving a male individual, dating back to Hastert's time as a high school wrestling coach and history teacher in Yorkville, Illinois, sources with knowledge of the case told ABC News. Associates and former colleagues of Hastert expressed surprise and dismay today over allegations that he disbursed $1.7 million in hush money payments to conceal alleged misconduct from a period before he entered politics. The school district that employed Hastert from 1965 to 1981 as a high school history teacher and wrestling coach noted it "was first made aware of any concerns regarding Mr. Hastert when the federal indictment was released" Thursday.


  • Obama: 'Handful of senators' standing in way of Patriot Act 29 May 2015 | 5:08 pm

    President Barack Obama speaks to media as he meets with Attorney General Loretta Lynch in the Oval Office of the White House in Washington, Friday, May 29, 2015. The president said a "handful of senators" are the only thing standing in the way of an extension of key Patriot Act provisions before they expire at midnight Sunday. (AP Photo/Carolyn Kaster)WASHINGTON (AP) — Blaming a "handful of senators" for stalled national security legislation, President Barack Obama said Friday he has told Senate Majority Leader Mitch McConnell and other senators that he expects them to take action swiftly to extend key Patriot Act provisions.


  • Amazon.com to develop groceries under own private label Elements: report 29 May 2015 | 12:03 pm

    You may soon be able to buy an Amazon.com private-label brand of soup, cereal and baby products as the e-commerce giant moves into the grocery sector. According to a report in the Wall Street Journal, Amazon is expanding its own Elements brand to an array of products that might otherwise come from a competitor such as Walmart or a grocery store such as Costco or Loblaw's. Earlier this month, Amazon sought trademark protection for Elements brand coffee, soup, pasta, water, vitamins, dog food and household items like razors and cleaning products.

  • The 20 jobs that robots are most likely to take over 29 May 2015 | 9:34 am

    The 20 jobs that robots are most likely to take overHamish Blair/Getty Umpires and referees have a 98.3% chance of being automated. Machines are only getting smarter and more efficient. So much so that they’re starting to take over both blue-collar white-collar jobs.  NPR recently posted a guide created by researchers that predicts the chance of our jobs being automated within the next 20 years. To make their projections, the experts scored jobs across 21 fields on nine possible traits, the four most important being: cleverness, negotiation, helping others, and squeezing into small spaces.  Mental health and substance abuse social workers appear to be in the clear, with a 0.3% chance of being automated. Telemarketers, umpires, cashiers, and several other jobs that are already being replaced by robots, have reason to worry, however. You can interact with the full guide here.  While the researchers admitted that these percentages are rough, the data offers insights into what the future may look like.  20. Electrical and electronic equipment assemblers Electrical and electronic equipment assemblers have a  95.1% chance of being automated.  Robots are becoming critical to the production process of electronics because of their precision and accuracy. They are being used to do things such as: load solar wafers into solar cells, place LED light bulbs, and inspect circuit boards, as reported by the Robotics Industries Association.  19. Postal service workers Postal service workers have a  95.4% chance of being automated.  Postal sorters, clerks, and mail carriers are being hit hard by automation. Not only are robots able to do tasks such as sort mail, but snail mail is becoming more and more obsolete with the increasing digitization of mail.       18. Jewelers and precious stone and metal workers Jewelers and precious stone and metal workers have a  95.5% chance of being automated. The Bureau of Labor Statistics predicts their employment to decline 10% between now and 2022 as robots begin assisting in the manufacturing and repairing of jewelry.      17. Restaurant cooks Restaurant cooks have a  96.3% chance of being automated. A noodle-slicing robot named Foxbot can be found at Dazzling Noodles, an open-kitchen restaurant chain in North China’s Shanxi province.  There’s another robot chef making crab bisque from scratch, thanks to 20 motors, 24 joints, and 129 sensors. The robot, designed by Moley Robotics, can complete the complicated dish in 30 minutes and even plates it. 16. Grinding and polishing workers Grinding and polishing workers have a  97% chance of being automated. Robots are increasingly able to grind or polish a variety of metal, wood, stone, clay, plastic, and glass objects.    15. Cashiers Cashiers have a  97.1% chance of being automated. Panera Bread announced that it will have replaced all of its cashiers with kiosks by 2016, according to a USA Today article. Additionally, self-checkout machines are continuing to spring up in grocery stores around the world.    14. Bookkeepers Bookkeepers have a  97.6% chance of being automated. The Wall Street Journal reported that big companies such as Pilot Travel, Verizon Communications Inc., and GameStop Corp., among others, are using software to automate corporate bookkeeping tasks. These companies now only need about 10 clerks to pay suppliers, as opposed to the 80 or so they would need without the robot bookkeepers.  13. Legal secretaries Legal secretaries have a 97.6% chance of being automated. Secretaries are disappearing from the job market now that technology allows bosses to field calls and arrange meetings themselves. 12. Fashion models Fashion models have a  97.6% chance of being automated. In addition to taking over fashion model jobs, robots are performing in other surprising ways, such as acting. Engineered Arts, a British company, has created a fully interactive and multilingual robot called the RoboThespian, which can hold eye contact, guess a person’s mood and age, and break into song. 11. Drivers Drivers have a  97.8% chance of being automated. Drivers and chauffeurs won’t be needed for much longer. Google’s self-driving test cars have driven thousands of miles without human intervention. Also, Uber CEO Travis Kalanick loves the idea of autonomous vehicles and announced that Uber will eventually be replacing all of its drivers with cars that drive themselves.    10. Credit analysts Credit analysts have a  97.9% chance of being automated. Automating the process of analyzing credit data and financial statements, and preparing reports with credit information, could result in a lower degree of risk. 9. Milling and planing machine setters, operators, and tenders Milling and planing machine setters, operators, and tenders have a  97.9% chance of being automated. Setting up, operating, or tending milling or planing machines is increasingly being delegated to machines.  8. Packaging and filling machine operators and tenders Packaging and filling machine operators and tenders have a  98% chance of being automated.  Using robots to prepare industrial or consumer products for storage or shipment is becoming more and more prevalent. Amazon now uses an army of robots — each 320 pounds and 16 inches tall — to bring shelves of goods out of storage in order to be shipped, reported Time.  7. Procurement clerks Procurement clerks have a  98% chance of being automated. It is now very simple for machines to place orders with suppliers for materials and services. Also, ordering over the internet — or “e-procurement” — will result in a decline of these jobs. 6. Umpires and referees Umpires and referees have a  98.3% chance of being automated. In professional tennis, a computerized umpire called Hawk Eye is already being used to help the chief umpire make close line calls. Players have the option of “challenging” a call, in which the Hawk Eye system will display where the ball landed and whether or not it was in or out. Its decisions are final.  Hawk Eye represents just one system being used to solve disputes in sports.  5. Tellers Tellers have a 98.3% chance of being automated. Chances are you haven’t used a human bank teller in a while. ATMs can provide most of the services that tellers offer. 4. Loan officers Loan officers have a 98.4% chance of being automated. A Bloomberg article reported that inroads are already being made at Daric Inc., an online peer-to-peer lender. The company has replaced all loan officers with an algorithm that identifies safe borrowers. 3. Timing device assemblers and adjusters Timing device assemblers and adjusters have a 98.5% chance of being automated. Machines are now able to perform the precise assembling, adjusting, or calibrating that timing device assemblers specialize in.    2. Tax preparers Tax preparers have a 98.7% chance of being automated.  Automating the process of preparing tax returns could result in much fewer errors, and the technology, Optical Character Recognition (OCR), already exists. 1. Telemarketers Telemarketers have a  99% chance of being automated.  Many of today’s cold-callers are not human. Robots can not only perform the job 24/7, but they can maintain energy and perkiness no matter how many rude consumers they interact with.         Now check out more jobs that robots performing that you never would have guessed… 14 surprising jobs that robots are doing Read more stories on Business Insider, Malaysian edition of the world’s fastest-growing business and technology news website.


  • 5 Options for Risk-Averse College Savers 29 May 2015 | 8:00 am

    For risk-averse investors, trying to keep pace with college costs while also choosing a safe investment vehicle for college savings can be tricky. It's understandable that investors are apprehensive about market turbulence, McKinley says. Compared with saving for retirement, the timeline for saving for college is much shorter, leaving less time to weather the swings of the stock market.

  • Unrepentant Lehman ex-CEO Fuld says firm 'was not bankrupt' 29 May 2015 | 4:18 am

    Richard Fuld testifies before the Financial Crisis Inquiry Commission for a hearing about extraordinary government intervention and the recent financial crisis, on Capitol Hill in WashingtonBy Lauren Tara LaCapra NEW YORK (Reuters) - Six years, seven months and 13 days after Lehman Brothers Holdings Inc filed for bankruptcy, its former chief executive, Richard Fuld Jr., is still insisting it did not go broke. "Lehman Brothers in 2008 was not a bankrupt company," Fuld said at a conference in Manhattan on Thursday, his first such public appearance since the financial crisis for which Lehman's massive Chapter 11 filing marked a tipping point. During a speech that lasted a little more than 30 minutes, Fuld waxed nostalgic about the history of Lehman Brothers and his career on Wall Street, and ruminated about financial markets and current events.


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