Thursday, December 23, 2010

Do You Know What ETF's are and Should You be Worried With Their Growth

This is a great article and the clips from it only touch the surface of the information contained. If you've ever wondered just how big the ETF's market is and how they are set up and managed this article offers a great overview.

And while it is more about the size and nature of the current state of investments in ETF's it also does a great job of helping you to understand this market.

Amplify’d from

Wednesday’s Worry – ETF Madness Hits $1 Trillion

After adding $209Bn (26.3%) in total assets so far this year, the US ETF industry has passed the Trillion Dollar mark led by $31Bn of inflows into fixed income ETFs, of all things as well as $29Bn of inflows into emerging markets, and $21Bn into domestic.  

Recent outflows have knocked commodity ETFs down to $11.4Bn, miles down from last year’s $32.6Bn inflow – rats leaving a sinking ship, perhaps?  

That would be very bad news for the firm that bought up 90% of the LME copper supply recently.  Do ETF traders really know something or are they a lagging indicator?

There is growing speculation surrounding what is believed to be the next breakthrough product in the ETF marketplace: Single stock tracking ETFs. Unlike their index-based cousins, these new single stock trackers would, as the name implies, track only a single stock, trade at exactly the same price as the stock to which they’re linked and consequently eliminate the need for single stock ownership. A top executive with a money management firm who is familiar with his company’s plans to launch such a product and was granted anonymity so he could speak freely, put it this way: “Think about the prospect of, say, a GE tracking ETF — an investor could capture over 99% of the movement of GE while simultaneously forfeiting any claim to a dividend and paying us up to 35 basis points to manage the ETF. What’s not to like? We think this product paves the way for the ETF marketplace to collect its next trillion in assets.”

Of course it’s all about the fees. ETF’s seem "safer" than stocks and they do have a lot of diversification benefits.  We are long on XLF and FAS because we sure don’t want to place a big bet on any particular bank but, as a group, we think they are in recovery mode.  When we short – we like to short DIA, TZA, SPY, QID, etc. on general bets the indexes will pull back (as if that EVERY happens!) yet we rarely go long on index ETFs other than very short-term as we usually know how to pick a good stock for ourselves, thank you very much, that will outperform a whole index.   

etf creating

The real problem with having $1Tn worth of US ETFs out there (and who knows how many foreign ETFs are holding US equities?) is that, as happened in 2008, should investors begin cashing out, they will create waves of indiscriminate selling – just as we currently have waves of indiscriminate buying.  If you wonder what kind of idiot would own NFLX at $186 – it’s probably you, as well as me, as we probably have some 401K or IRA that’s tracking the S&P or the Nasdaq and NFLX is in both.  


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