ETF Industry Continues to Grow - Quietly

A recent article in the April 21st issue of The Economist provides a decent review of the ETF industry today. It’s a nice bit of commentary so I will add only a little of my own.

In the recent past, I would have thought that ETFs in aggregate were a fairly niche sector of the financial services industry. If, according to this article, the US-based ETF industry is at roughly $450 billion, it’s still less than 5% of the $10 trillion mutual fund industry. So, it’s not really the size but more of the growth that has gained this industry some attention. With attention comes some negative opinions of course, and there was a reference to “valuations that recall the dotcom bubble” but that was a reference to WisdomTree’s (WSDT.PK) stock price over anything else.

I think that there are very many investors who know very little about ETFs and very few investors who know a lot. What I mean is that many investors might have heard of Spiders or Cubes, and possibly even traded more than just these, but they likely don’t have a clue of the underlying structure of the ETF that makes it different from a closed end fund or mutual fund. That lack of education, and thus full understanding, is the same with hedge funds and anything else in investing, I suppose. Maybe it’s just the circles I revolve in, but I believe that many people (even the most ordinary of investors) are picking up more on ETFs. The coverage of the pros and cons of ETFs in a mainstream periodical like The Economist leads me to believe that this will continue as the ETF industry expands.

Time Magazine ran this article on ETFs in the July 24, 2006 issue as well. I know that here in Canada a few national magazines (not specifically focused on business or investing issues) have also covered ETFs in one manner or another and I would guess the same would be true for many other countries. Despite this, I think we’re still early in the ETF industry’s growth cycle.

At a recent conference, I spoke privately with many industry insiders about the slow acceptance of ETFs in Canada relative to the US. The view from others was that it’s the same story in the US. Someone commented that if you shouted “ETF” in the middle of Grand Central Station, no one would know what you were talking about. I personally think that’s a big exaggeration, but it is sometimes difficult as an “insider” to determine what the pulse of something is on Main Street. Coverage like these stories in broad market publications leads me to believe that only in the past 12 months have ETFs started to gain real market acceptance. Thus, the quote from Deb Fuhr of Morgan Stanley forecasting ETF assets reaching $2 trillion may in fact be quite conservative. Many would agree that the size difference compared to the mutual fund industry would also confirm this.

Now, if there’s a cover story on Time or The Economist related to ETFs … then we have a different situation. I seriously doubt that will happen any time soon (in the next few years) but when it does, you’ll start hearing more than just negative words about the industry and its participants … you’ll hear about investors shorting the stocks of ETF providers. My feeling is that there will be many more front cover stories talking about hedge funds, private equity, real estate and even mutual funds over the next while leaving the ETF industry alone to quietly continue to grow.

Comments

[smokey888]

Most articles I see about ETF's are negative or at least have one huge negative in the article. Even your suggested article from Time magainze included in the last paragraph something that no common investor would ever go any further in learning more about ETF's:

"Though popular and efficient, ETFs aren't always appropriate for novices. But they do allow you to play the commodities game without open-ended risk. Still, currency and commodity plays are volatile, a place for your more speculative investing. Of course, as Jack Sparrow, the buccaneer portrayed by Johnny Depp in Pirates of the Caribbean, says, "Not all treasure is silver and gold, mate." Maybe he's invested in the Russell 2000."

"aren't always appropriate for novices", and this next one would scare the cob-webs out of any common investor, "But they do allow you to play the commodities game without open-ended risk"! I've been in ETF's for two years and I have no idea what or how ETF's relate to commodities and don't want to know but including a line like this only further distances the common investor. I sometimes wonder if it's not done on purpose, after-all, there's a lot money to be made in selling Mutual Funds and common stocks.:)

[Richard Kang]

DR: Your closing brings up a question that suggests the marketing of ETFs is purposefully convoluted. No, not everything can be blamed on mutual funds and Wall Street in general ... a LOT, but not everything. The blame is squarely on the ETF industry. From the few ETF related conferences I've attended in the last few months, I know that the industry understands this perfectly well. With further, well publicized, confusion related to products from firms like MacroShares and even some of the larger, more established ETF providers, it's clear ... the level of education and succinct communication to investors will have to be significantly improved. Expect greater involvement from venture capital firms (and other "advisors") especially with smaller new entrants as the product development is not the issue, it's the effective marketing and of course, distribution.