Too Many ETFs? Buyer Demand Doesn't Indicate it

Roger Nusbaum submits: There's an article on Marketwatch that warns too many ETFs have been created and expresses concern that this may be a sign of a top. I think the article is not specific enough to draw the conclusion made about a top.

ETFs create access. To know whether ETFs, broadly speaking, are a sign of a top, we would need data that shows a faster growth rate than normal of new market participants and that those newbies were in fact buying ETFs. I don't know where you would find data like that but anecdotally, I run into a lot of people who have no idea what ETFs are.

Part of the article reads as though narrower sector funds are the bigger issue. In theory, and also historically, too much supply of product for a sector can mean trouble coming.

Are we at that point now with sector ETFs? Lets look at semiconductor ETFs. There have been two newish ones that I am aware of, one from PowerShares (PSI) and the other from StateStreet (XSD). PSI has $60 million in assets and XSD has $50 million. These numbers are quite small. The point here is that new product will not necessarily mean there is demand for those products. It is not like the Internet products where everyone rushed in. PSI and XSD are just one example to show there is no stampede in.

People are not rushing into all of these new products. If ETFs are not causing a mania to buy, any mania to sell will come from elsewhere.

Comments

[Andrew Herdman:]

www.indexuniverse.com/ does a pretty good job of keeping up with new ETF developments. Interesting article today on iPath Exchange Traded Notes by Matthew Hougan, about two new commodity index trackers from BGI, but structured as financial derivatives rather than redeemable ETF's. See
www.indexuniverse.com/...;id=1481

Andy Herdman

2006 Jun 22 06:39 AM

[Tim:]

Thank you Andy. I appreciate your taking the time to respond.

Tim

2006 Jun 22 08:58 AM