Here is a link to an article on Marketwatch that warns too many ETFs have been created and expresses concern that this may be a sign of a top.
I think the article is not specific enough to draw the conclusion made about a top. ETFs create access. To know whether ETFs, broadly speaking, are sign of a top we would need data that shows a faster growth rate than normal of new market participants and that those newbies were in fact buying ETFs. I don't know where you would find data like that but anecdotally, I run into a lot of people that have no idea what ETFs are.
Part of the article reads as though narrower sector funds are the bigger issue. In theory, and also historically, too much supply of product for a sector can mean trouble coming.
Are we at that point now with sector ETFs? Lets look at semiconductor ETFs. There have been two newish ones that I am aware of, one from PowerShares (PSI) and the other from StateStreet (XSD). PSI has $60 million in assets and XSD has $50 million. These numbers are quite small. The point here is that new product will not necessarily mean there is demand for those products. It is not like the Internet products where everyone rushed in. PSI and XSD are just one example to show there is no stampede in.
The point here is that people are not rushing into all of these new products. If ETFs are not causing a mania to buy, any mania to sell will come from elsewhere.
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4 comments:
I don't follow this guys (Thomas Kostigen) logic. How can buying a sector at low expense be worse than an individual stock pick? If the market is overpriced then just say, 'flee the market, the sky is falling, and go into bonds'. I missed his point entirely. Tom in Indy
Why would a fund manager wait until an ETF is launched to check his portfolio for topping out? Since the SEC takes 9 to 12 months to approve an ETF once it is filed, that data might be getting a little old by then.
OG
Both Tom and OG make good points.
Personally I think it is worthwhile to explore the possibility raised in the article. The conclusions drawn aren't supported by the rest of the content.
However if the author explored it and then said the thesis holds no water, the article would not have been published.
This is clearly not the best-written article on the subject, but I do think there's an important nugget of advice in there.
That is, don't forget that ETFs (like all funds) are created by firms that get paid based on the amount of assets they gather. Fund companies will therefore tend to--but not always--launch products that track sectors, countries, commodities, etc. that have performed well and may be closer to the top than the bottom.
It's just something to keep in mind. If you use ETFs as a tool to execute an intelligent overall investment strategy (as our friend Roger does) you have nothing to worry about.
Except the occasional bad article.
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