We’re not even halfway into 2009, and already it’s been an eventful year for the exchange traded fund (ETF) industry. What does all the activity mean in the long run?Volatility in the markets remain high, but the uncertainty certainly bodes well for the ETF industry, reports David Bogoslaw for BusinessWeek. One reason is that their low cost allow investors to jump in and out of positions with ease throughout the trading day.
Other events we’ve seen in recent months that could contribute to their popularity include:
- The poor performance by many mutual funds, in addition to the capital gains distributions they had to pay out, only added to investors’ eagerness to shift into tax-efficient ETFs. Around $170 billion in assets transferred from mutual funds to ETFs last year.
- Barclays and their iShares ETF family has not dissolved, they are just in the process of changing hands. And the likelihood of expense ratios going higher is slim.
- The actively managed ETF has not taken the market by storm just yet, but blame it on depressed markets. In a recovery, these types of ETFs could gather more interest as a lower-cost version of what mutual funds do.
- Leveraged ETFs that double or triple the daily return of an underlying market index, or a negative multiple of the return for inverse ETFs that move against the index, have garnered a lot of attention, in an effort to regain some of the past years’ losses. These ETFs are best for day-to-day trading rather than a buy-and-hold strategy.
- The ETF industry is giving more access to specific asset classes, such as residential or commercial real estate. There are some areas in need of more attention, according to industry experts, and hundreds of ETFs are currently in registration to represent these areas.
- ETFs are a fairly sophisticated product that requires an understanding of the creation and redemption process, the difference between indicated value and actual price, and why the funds often trade at a discount or premium to their net asset value. The availability of tools you have at your disposal is growing to accommodate the need to understand.
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.