The exchange traded fund industry is moving through its adolescent growth spurt, but after pumping out almost 1,500 products, the industry is starting to slow down a bit. However, there are several sectors that continue to grow rapidly, such as bank loan ETFs and fundamentally weighted strategies.
After picking out all the conventional investing ideas, the industry is finding it harder to come up with new ideas. In the first half of the year, 70 new ETFs were launched, whereas 126 products were added over the same period year-over-year, according to the American Association of Individual Investors.
There are 1,494 U.S.-listed ETFs with $1.55 billion in assets under management.
Since most ETFs try to reflect the performance of an underlying index and the index follows a rigid objective, many new ETFs have been pigeonholed into very specific strategies with limited appeal, which has lead to greater closures. AAII pointed out that there were 1,475 ETFs available in 2012, which means that the industry saw a net increase of 19 ETF products since last year.
Instead of marketing another “me-to” product, fund sponsors will have to find new ways to index investment strategies or reconfigure exiting indices into a new investment style.
For instance, providers can’t expect to come up with another profitable S&P 500 index-based ETF as the iShares Core S&P 500 Index ETF (NYSEArca: IVV), SPDR S&P 500 ETF (NYSEArca; SPY) and Vanguard S&P 500 ETF (NYSEArca: VOO) account for a combined $185.5 billion in assets. [Fundamental ETFs Try to Challenge DFA: Report]
Consequently, fund sponsors engineered modified strategies, or “enhanced” indexices, that expand on the traditional benchmark, including the Guggenheim S&P 500 Equal Weight ETF (NYSEArca: RSP), iShares S&P 500 Growth Index ETF (NYSEArca: IVW), iShares S&P 500 Value Index ETF (NYSEArca: IVE) and PowerShares S&P 500 Low Volatility ETF (NYSEArca: SPLV). [Alternative Weighted Index ETFs Attract Heavy Inflows: Schwab]
For more information on ETF indexing, visit our indexing category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.