Watch Expenses & Spreads For HealthShares, PowerShares, WisdomTree ETFs

Jim Wiandt mentions that seed money is drying up in the ETF space, and that’s true: we’ve seen funds like the HealthShares launch with as little as $2.5 million in seed money. A few years ago, that would have been $25 million, easy.

What does that mean for investors? It means keep a close eye on spreads and premiums. I glanced at the current spreads for the 18 HealthShares ETFs, and they averaged about 12 basis points at the close of trading yesterday. The day-end premiums-to-NAV were much higher, but not really applicable, as they can be thrown off if the last trade in the fund is at 3:30pm and the underlying trades through until 4pm.

Use limit orders, folks.

One thing that's not drying up is seed money for start-up ETF firms. That money seems to be swirling, and some of the valuations firms are getting are … impressive.

Everyone points to the PowerShares buyout, valued at up to $700 million with incentives, but the various fundraisings from WisdomTree and others are just as impressive. WisdomTree managed to do a $56 million private placement last year at $3/share, at a time when its stock was trading at $8/share. Incredibly enough, the stock didn’t budge. Now that’s loyal shareholders.

The $56 million deal valued WisdomTree (WSDT.PK) close to $900 million; shares have pulled back a bit, however, and the company is now worth around $560 million. Still, that's not bad for a start-up that’s only been around for 30 months and has around $4 billion in assets. WisdomTree shares currently trade on the Pink Sheets, but it hopes to jump to the Nasdaq by year-end.

The only worry I have with these huge valuations is that they will force companies to boost their expenses ratios. We’ve seen some serious expense ratio creep recently. The new international PowerShares ETFs charge 0.75% in expenses, the highest I’ve seen for a non-leveraged ETF. Morningstar says that the average expense ratio on ETFs launched in the last six months is 0.67%. New funds are always going to be more expensive than established funds, but it’s a worrisome trend, and one worth watching.

Editor's note
The new international PowerShares ETFs referred to in this article are:
PowerShares Global Water (PIO), PowerShares Global Clean Energy (PBD), PowerShares Dynamic Developed International Opportunities (PFA), PowerShares Dynamic Asia Pacific (PUA), PowerShares Dynamic Europe (PEH).

The HealthShares ETFs referred to in this article are:
HealthShares Autoimmune-Inflammation (HHA), HealthShares Cancer (HHK), HealthShares Cardio Devices (HHE), HealthShares Cardiology (HRD), HealthShares Composite (HHQ), HealthShares Dermatology and Wound Care (HRW), HealthShares Diagnostics (HHD), HealthShares Emerging Cancer (HHJ), HealthShares Enabling Technologies (HHV), HealthShares GI/Gender Health (HHU), HealthShares Metabolic-Endocrine Disorders (HHM), HealthShares Neuroscience (HHN), HealthShares Ophthalmology (HHZ), HealthShares Patient Care Services (HHB), HealthShares Respiratory/Pulmonary (HHR).

Comments

[Frank Li]

Very interesting article. Spreads and expenses are rising on the new specialty ETFs, while the broad index ETFs are getting cheaper due to competition (eg. the new bond ETFs from State Street and Vanguard).

Perhaps investors who want to play themes, (like healthcare subsectors and "green" investing) just don't care about expenses. If that's correct, the specialty ETF providers will have very profitable businesses.