Too many New ETFs?

There are new ETFs slated to open throughout the year and with the approval of the ‘alpha’ ETF format the numbers could grow even larger. Chances are you should ignore most of them. The streamlined approval system proposed by the Securities and Exchange Commission could expand the numbers faster. The challenge for you and me as investors is the evaluation process. Much like the daunting issue facing investors when it comes to mutual fund research the ETF marketplace is becoming just as crowded and confusing. It is a shame we have allowed something that provided simplicity to take on complexity. This could make the process time-consuming and difficult for the average investor.

The big issue is how much better will you and I as investors be served by all these new products? This is not an unusual phenomenon in the financial services industry. In 1983 there were 893 mutual funds and most investors thought that was too many. Today there are more mutual funds than individual stocks listed on the New York Stock Exchange. The assets have ballooned to more than $3 trillion. Those assets are regularly under attack by various products being developed throughout the industry. From my perspective we haven’t mastered the regulation on mutual funds and they have been around a lot longer than ETFs. Opening the door to everything imaginable will only make the task more difficult.

Many of the new products are designed on theory or hypothetical scenarios. The test for many will be that reality stands somewhere in-between theory and hypothetical. While these may work looking backwards, they will need adjustment as reality is determined. This leaves me not wanting to necessarily be the guinea pig for the process. I am willing to let them establish themselves first and then make any determinations from there. It is important to remember as an investor – it is your money. The job of the financial institutions is to get you to give it to them. They want your money for as long as possible, so they can make as much as possible in fees. I am all for everyone making money, especially me. Therefore, keep the focus on what you are trying to accomplish with your portfolio in relation to your financial goals. If these new products work to fill that void great otherwise, next.

Historically ETFs have been index funds which trade similar to stocks. This has made them attractive to investors as they allow intraday access for trading and investing. Lower fees have been an additional plus for ETFs, but many of the index mutual funds have negated that advantage with recent developments. I like the structure of ETFs for building a portfolio and knowing exactly what you own due to the transparency of the structure. This is not true of mutual funds, they disclose holdings periodically and generally at least 30 days in arrears. Thus, the transparency is clouded by the delay. The index ETFs allows you the ease of investing your money in the sectors of the market where your research leads you. This is the reason behind SectorExchange.com, allowing you the investor to determine which pieces of the market are moving and then capture them through the use of ETFs.

Investing overall is a challenge due to the shear size and number of products in the financial services arena, not to mention the differences of opinions as to which bests suits each need. I have found in my years of experience in dealing with both my own money as well as those of investors, that simple is usually better. KISS – Keep It So Simple, You Can Do It!