That hasn’t stopped many of the ETF naysayers from sounding the death knell. After all, 40 ETFs have closed their doors so far in 2008, and they’re the first closings in the industry since 2006. But Brooks has a question for those who believe ETFs are finished, “Whoever thinks ETFs have had their run, my question is what do they believe is the next growth vehicle?”
When an ETF does close its doors, though, it’s worth taking a look at what went wrong and what could be done better the next time around.
Brooks feels the closings this year are because of a combination of factors: down markets, not-so-hot ideas, lack of interest and so on. “Perhaps their providers didn’t give them enough time, or didn’t do enough to support them. Maybe the strategy wasn’t consistent with a long-term commitment to the business.”
He suggests taking a look at the mutual fund industry, because funds close and merge every day. “It’s just a survival of the fittest that will happen in any business.”
Brooks has heard the criticism that ETFs are launching too quickly, but that happens in any business or industry – the unsuccessful products will be killed off.
The ETF industry does have some room for improvement, namely in the area of education. While many providers are stepping up their efforts, and PowerShares has its own “PowerShares University,” Brooks says there’s still a gap between the number of products available and information on how they can be put to use.
If ETFs get it all right from here on out, though, it’s not a certainty that they would ever overtake mutual funds.
“Mutual funds are at $12 trillion, so if it does happen, it won’t happen very soon,” Brooks says. Instead of focusing on gaining ground on mutual funds, he says, the ETF industry should instead tackle issues such as how to break into the 401(k) markets, something he feels is one of the biggest voids.