Jim Cramer on ETF Proliferation

We are not sure how to take this, but Jim Cramer has joined us in our criticism of the flood of ETFs coming to market. While we are not big fans of this latest incarnation of Cramer we are always glad to have some one, any one, agree with us.

In a piece at TheStreet.com Cramer laments the rush of ill-conceived funds to the marketplace and the seemingly extreme some fund sponsors are going:

The proliferation of ETFs has gotten so out of control that I would not be surprised to see an ETF of all ETFs. Or a best-of-ETFs ETF. Or a worst-of-ETFs ETF for those who want to bet that the ugly ducklings are going to become swans. How about an ETF that buys high-performing ETFs and shorts poor-performing ETFs?

Not surprisingly Cramer puts the blame on Wall Street for the proliferation in funds because of the potential feeds. We disagree with Cramer that the only ETF we need are based on big, diverse indices, but we think he's correct in decrying the changes in the ETF marketplace.

Tom Lydon at ETFtrends highlights a piece by John Authers in the Financial Times on the high turnover at one newly launched ETF. The First Trust DB Strategic Value (FDV) is expected to have turnover in the range of 100-120% on an annual basis. Some interpret this as a step that brings closer the long-awaited “active ETF.” The range of new ETFs is already blurring the line between passive and active portfolios.

The bottom line is that the original arguments for ETFs (indexed, low cost, low turnover, tax efficiency) have been brushed aside in this rush for shelf space in the ETF marketplace. In all likelihood the marketplace will sort out the winners from the losers in this space, but the risk is that investors get hurt in the interim.

Comments

[Asif Suria:]

With over 8,000 mutual funds in the US (over 55,000 worldwide) and barely over 200 ETFs, I do not see why everyone feels that there are too many ETFs.

If I want to invest 2% of my portfolio in microcap stocks, an ETF like PZI, IWC or FDM may prove a better alternative to investing in a couple of microcap stocks. The more choices we have the better it is, unless you are the guy from that Carl's Junior ad who scans a whole aisle of bread with a perplexed look on his face before heading to the nearest Carl's Junior to get a simple burger.

2006 Jul 12 07:51 PM

[Elliott:]

I agree with commenter Asif Suria. Pundits say too many ETFs are bad, but none of them have presented any objective evidence that ETF proliferation is harmful to anyone. In addition to the many mutual funds that Asif mentioned, there are also over 600 closed end funds -- those don't seem to be causing any harm.

Note that today's top performing ETF is the new ProShares Short QQQQ ETF, symbol PSQ. Up 2.1% today while the rest of the market is down. A smart investor using PSQ as a hedge would have appreciated the wide selection of ETFs available.

2006 Jul 12 11:15 PM