ETF Deluge: Wait For the Tide to Recede

by: David Fry

DFry Market Outlook 14-11-2006

ETF TSUNAMI ALERT

An informal calculation of the number of new ETF issues coming to an exchange near you amounts to be around 300. What?!? That's right—around 300 ETFs are now in registration with the SEC. Rydex has filed for 96, ProShares 66, Wisdom Tree 60, PowerShares 35, and Barclay's, State Street and others have some in the hopper as well. They're "carpet bombing" the market. What's an ETF expert to do? Only one thing -- head to higher ground and wait for the tide to recede.

We're not unhappy with all the new issues coming to market, since within the rubble there will be some gems. But given the sheer number they may be hard to find, and that, my friends, is the challenge. Even more difficult sometimes is in the issuer's rush to get their products out the door they often forget to provide quote vendors with appropriate symbols or data history for linked indexes. Getting adequate index history is step one, and sometimes impossible. So, we'll just create a new folder [maybe labeled "research lab"] to put those in and let them age. You see, some issuers just "create an index and go" not thinking anyone really wants to see any historical data since the issues are just, well, really cool, so who cares? Silly us! Wanting to do some due diligence is just getting in the way.

It shouldn't be too shocking to see so many new ETFs in registration. Every issuer on Wall Street wants to get in the game to either make fee income or be bought out by another firm looking to get in the game quickly. Due diligence involving all these issues is a challenge for the end-user naturally. But in all the rubble there will be some winners.