Isn’t getting more popular a good thing? Yet, it seems like the bigger exchange traded funds (ETFs) get, the more problems the ETF industry needs to attend to. The increasing problems ETFs are facing has become the impetus for talks about a new ETF trade group that will back ETF interests.
The ETF industry has been vexed by the warnings the Securities and Exchange Commission (SEC) issued over leveraged and inverse ETFs, and the warnings observers noted about what’s seen as a possible bubble-esque quality forming in ETFs, writes Matthew Scott for Daily Finance.
The Investment Company Institute (ICI) is a trade group that’s supposed to address those issues, but some feel that ICI won’t be able to unbiasedly advocate for and educate the public about mutual funds and ETFs as ETFs continue to grow. Any perceived threat to the mutual fund industry can be interpreted as a threat to the ICI – primary members of the ICI are mutual fund companies that help pay the institute’s fees.
Five years ago, ETFs were not a threat to the mutual fund industry. Today, it’s more of a reality that ETFs may be digging into the market share of the more conventional mutual funds. If you are a middle of the road mutual fund company and you have so-so performance, and average or above-average fees, as time goes on, ETFs will be a bigger and bigger threat.
In 2008, the ICI formed a Standing Committee on ETFs that serves the ETF segment of the fund industry. This committee is seen as the right first step, though, there hasn’t been a lot of substance that has come out of these meetings. Irving Straus, a mutual fund and securities industry veteran, believes that “the ICI may do some things to a point, but they are not out there looking to defend ETFs necessarily.”
Straus is pushing for an independent organization for ETFs. ETFs only make up 7% of overall mutual fund assets, and many fund providers don’t seem to see the necessity of this trade group with ETFs being such a small portion of the industry.
In order for an independent ETF group to be effective, two things would need to happen:
1. There has to be full participation and endorsement by the major providers – especially major players like BlackRock, State Street and Vanguard.
2. The goals and objectives of the group have to be clear. We need more education on ETFs – their qualities, benefits and how they work. Providers have been doing a great job of this, but there still needs to be more. Another key point is the 401(k) market. It would be interesting to hear more about the ETF industry’s game plan on that front.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.