“Too much is never enough.” – MTV slogan

That slogan today could hold for the ETF industry as well.  Josh Brown writing at Financial Adviser notes the lengths to which the ETF industry is going to create new indices to base new ETFs upon.

It was one thing when they started creating ETFs for every single index in creation, fine, I use a bunch of them and choice is what separates us from Russia (where there are two TV channels, one channel that tells you what’s on the other channel).  But now we’ve reached the point where ETF product guys are paying index companies to invent new indexes just so they can ETF them.  This isn’t the tail wagging the dog, this is the tail giving birth to puppies.

We have been early and wrong in our belief the industry would begin aggressively weeding out the wheat from the chaff.  Instead the industry has gone to great lengths to extend its reach into niche and gimmicky ETFs.  This quite a change from the origins of the industry.

The ETF industry started off as this scrappy underdog creating an entirely new class of vehicles like the SPDR S&P 500 Trust ($SPY) that provided investors with an entirely new way to invest and trade.  For this reason the ETF industry has experienced a ‘halo effect’ which lasts to this very day.  However as Josh notes the ETF world has morphed into something altogether different these days.  The industry now is a huge snowball rolling downhill picking up every potential product in its wake.

It would be great if as Josh suggests the industry took a breather from creating new products.  That would allow it to work off the backlog of ‘zombie ETFs‘ that populate the ETF Deathwatch.  That is not going to happen.  There are too many investment management firms on the outside of the ETF industry looking in.  The launch of the actively managed Pimco Total Return ETF will convince those fence sitters they need to get in the game.

The open-end mutual fund industry is hurting for assets and ETFs are the only growth game in town.  Pure play ETF firms like WisdomTree Investments ($WETF) will likely attract attention from established investment management firms desperate to get into the game.  This is great for those players already with a foothold in the ETF industry, but will only make ETF shelf space even more valuable.

Investors on the other hand need to take note of this explosion in niche ETFs with a skeptical eye.  ETF providers are not providing a public service, they are running a business.  A business that need customers like you.  They say that investment products are sold, not bought.  If so, investors should make themselves the best-informed consumers possible by visiting A-List ETF sites and becoming smarter shoppers.  Our thoughts haven’t changed all that much from this post from a year ago:

The ETF industry is, for now, a competitive one.  This competition works to both drive down the expense ratio of plain vanilla funds at the same time generating new, more specialized funds with higher expense ratios.  In a certain sense it is not unlike the typical supermarket.  The supermarket entices you in to purchase their loss-leaders, like milk, in the hope you will also purchase higher margin products, like packaged goods.  There is likely room in you portfolio (shopping cart) for both kinds of funds.  The question for investors is one of education and balance.


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