We all know the Golden Rule, but does the exchange traded fund (ETF) industry have their own set of them?
Matthew Hougan for Index Universe on Seeking Alpha suggests five of them to ensure that the industry continues to grow and thrive:
- Stay cheap and establish an expense ratio glide path. As Hougan says, "Cheaper" is one of the first and foremost adjectives used when telling someone about ETFs. For that reason, they should remain cost-efficient and bigwigs like Barclays have established a glide path so that expense ratios fall as assets under management rise.
- Don’t sell hot performance. Hot performance and day trading should not be used to describe ETFs. Most of the negative press has been about ETFs falling into this category, and they do not belong there.
- Watch tracking error. Illiquid asset classes attract this type of error, and optimization techniques versus replication are vying for the spotlight.
- Invest in liquidity. ETF spreads have stayed tight, but with many ETFs moving to Arca and the all-electronic trading platforms, spreads have become a new threat.
- Avoid exogenous problems. The industry as a whole has no nicks in its reputation, but that’s not to say surveyors aren’t looking for one. One negative event could shape the perception of an entire industry.
ETFs have enjoyed a good reputation so far, and the industry should work to ensure that it continues.
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.