The exchange traded fund industry is growing at a faster pace than the mutual fund business. However, experts say the new phase of ETF growth will be dependent on sales and distribution as it becomes more difficult for funds to stand out in an increasingly crowded field.
“We’re close to a tipping point in terms of numbers,” said Todd Rosenbluth, director of ETF research at S&P Capital IQ, in a recent media report.
Mark Jewell for Associated Press reports that the ETF industry has attracted $100 billion in new cash, each year, for the past six years. Total assets under management have grown to $1.4 trillion, and there is potential for it to grow to $3.5 trillion by 2016.
Yet timing is everything for providers in the ETF business, and experts warn that new entrants into the industry will find it difficult to gain traction. In fact, new ETFs that are launched by existing providers are having a tougher time gathering assets, as products currently trading are of the highest quality at the lowest price point.
The total number of ETFs trading are set to fall this year, as there were 1,190 ETFs on the market at the end of March, four less than the end of 2012, according to Investment Company Institute research. The problem is many ETFs are not garnering enough assets to remain profitable. Last year, 81 ETFs closed, the most in one year. [Which ETFs are More at Risk to Closures?]
Todd Rosenbluth of S&P Capital IQ noted in a recent interview with Mark Jewell for AP that the number of index ETFs launches may continue to decline because it is hard to differentiate these products. There are already a few successful ETFs trading that track the S&P 500 with much success; the SPDR S&P 500 (NYSEArca: SPY) and the iShares Core S&P 500 (NYSEArca: IVV). The need for another such ETF is simply not there. [Equal Weight ETF Consistantly Outperforming the S&P 500]
Another hot topic in the ETF industry has to do with commission-free ETF trades. Rosenbluth stated the aspect of free trades pertains only to those investors who trade frequently. A free trade is more important when there are several transactions in a day, but a buy-and-hold investor who invests through a financial advisor is already paying a commission, so the question really boils down to ETF quality and if it is performing well.
Investors should not be fooled by a commission-free trade. If the ETF trades for free, it doesn’t mean that it’s worth it. The fund may not be a good tool, and a free trade could just be a selling point for an underperforming ETF. [What to Look For in a Core ETF Investment Portfolio]
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.