In a way I agree and in a way I disagree.
I agree that no matter how many hundreds of ETFs exist any retail investor (or someone like me who manages separate accounts for individuals) will only need a handful at the most. I don't really use ETFs like large cap value or mid cap growth, I prefer to get narrower effects but for folks that do use these types of ETFs there are a slew of them that get no attention that could be better than the more actively traded ones from iShares.
This chart captures some (I know I left out the iShares Morningstar version) of the mid cap growth ETFs; we've got two from iShares, one from Rydex and one from PowerShares.
I don 't use any of these but plenty of people do. I would think that anyone using one of these funds should know the others exist and if they can get a handle on why PWJ lead the way and form an opinion about whether it continues or not might want to switch? Well maybe not but I think the ability to have some choice is a big positive.
Lastly on this is the ProShares Double Long Mid Cap Growth (UKW) which mimics twice the IWP charted above, the second best performer of the group. Could someone who would put $10,000 into IWP put $5000 into UKW instead, leave $5000 in cash, earn 4% on both as a valid strategy? It is plausible even if it is not for you.
Some people use cap/style ETFs and so that there are many sector ETFs means very little.
I tend to use more sector ETFs than anything else and so more cap/style ETFs means very little to me. You get the idea.
A reader asked me to qualify the following from my post on Tuesday;
"There are ways to adjust things like volatility, yield, correlation, style and so on if are willing to explore a little bit, do some work and think outside the lines."I think he was more interested in a fixed income context but I'm not sure.
This may not be easy to articulate but I find that I can make adjustments to things like overall volatility, average cap size, and so on (in the equity portion) with certain individual stocks or narrowly themed ETFs. At times I have swapped a stock for a sector ETF to reduce volatility and vice versa. As 2006 ended the portfolio was feeling a negative impact due to the cash and double short fund but adding just a couple of stocks early on this year brought me much closer to the market without being a closet index fund, as I found out, luckily, during the dip that might now be over.
I'm not sure if other mangers think of it this way or to what extent they do but I think this is subtle, but not difficult with enough time to spend, and not captured very well by simply adding a small cap growth ETF or dividend ETF.
As for fixed income, for some things individual bonds are the better way to go like with treasuries the vast majority of the time and munis most of the time. I have exposure to convertible bonds with a CEF as I think that makes much more sense risk wise and liquidity wise.
For now I don't have much mortgage exposure, some folks have Federal Home Loan bonds, individual issues with very short maturities, but I might go heavier there at a different point in the cycle.
I have almost no emerging market debt exposure now because of narrow spreads but spreads will widen again and there CEFs would be the place I would seek out exposure.
I use one CEF for developed market foreign bonds but am starting to warm to the idea of individual issues, sovereign paper only, as apparently Schwab can accommodate small-ish orders. They have a minimum order size of US$100,000 but once it is bought I can allocate as small as I want to client accounts.
This opens the door to something like pairing a surplus country like Norway and a deficit country like Australia in a 70/30 split with maybe 15% of the bond portion. You might net a slight pick up in yield versus US treasuries but more importantly a hedge against a dollar decline. For now this is just a thought.
Whether I do the above trade for clients or not you can see where a blend of narrower tools creates the chance for better diversification by accessing several markets. The fixed income ETF market is very thin on market segments and I am not very enthused but I do use the TIP ETF across the board.
Hope that helps.