Has the wave of popularity in exchange traded funds (ETFs) and the increase in ETFs coming to market been irresponsible? According to Russ Kinnel of Morningstar the answer is "yes". Kinnel feels The Great Exchange Traded Fund (ETF) Land Grab has started a headstrong race to mark out some space – any space. He gives ETFs credit for some good long-term investments but implies ETFs are getting caught up in sales tactics. Kinnel admits, "True, we haven’t seen any true scams yet, but we have seen plenty of really, really bad ideas that no prudent investor would touch."
I’m not sure if I agree with Kinnel giving the mutual fund industry credit for lessons learned from a bear market where conventional fund companies shifted away from sales tactics that brought long-term grief instead of gains. The fact is, by the time the bear market arrived, the horse wasn’t just out of the barn, it was galloping through the next county.
Will the same happen in the ETF industry? Maybe.
Kinnel correctly points out the need to be the first to market in order to be the most heavily traded while others entrants join in. He feels this explains the frenzy of questionable ETF launches. You could argue some of the new ETF niches are so narrow there are barely enough stocks to buy in the corresponding index.
Finally, Morningstar has a pristine reputation in the industry. However, while the company continues to caution investors about ETFs, I’d like to see them be a little more forthright about their financial dependency on the conventional mutual fund industry.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.