ETF sponsors are quick to rattle off a list of reasons for not wanting to stir the pot. Some said it's unrealistic to expect investors to jump to ETFs because of a "few bad apples" in the mutual fund industry.
Others said the ETF industry, whose $127 billion in U.S. assets account for less than 2% of the fund industry's nearly $7 trillion, simply doesn't have the money to spend on a lot of self-promotion.
"ETFs don't have the big expense ratios and 12(b)-1 (fees) that mutual funds do to go out and promote their efforts," said Gus Fleites, managing director of State Street Global Advisors' adviser strategies group. "As a result, they tend to be the quiet giants of the industry."
But ETF sponsors have another good reason to keep their mouths shut: conflicts of interests.
Indeed, almost all sponsors of ETFs are also big players in the mutual fund industry, including Boston's Fidelity Investments, the nation's No. 1 fund company, and Vanguard Group Inc. in Malvern, Pa., the No. 2 player.
By pushing ETFs too aggressively, they run the risk of further damaging investor confidence in the mutual fund industry. More significantly, they risk steering mutual fund investors toward a significantly less profitable side of their business.
"A lot of these folks are different pockets of the same pants here,'' said Dan Dolan, director of wealth management strategies for the Select Sector SPDR Trust, the Garden City, N.Y.-based marketing arm of Alps Financial Services Inc., a fund distributor in Denver.
"You're not going to see anyone beating anybody up over this one. If you see any (advertising of ETFs), you will see it with a positive spin, one that doesn't take a shot at the mutual fund industry.''
Gary L. Gastineau, a managing member at ETF Consultants LLC in Summit, N.J., said the ETF industry might also be abstaining from self-promotion for fear of inviting closer scrutiny into flaws with its own model.
Specifically, Mr. Gastineau said industry studies suggest the pre-tax performance of many of the most popular ETFs tends to lag the performance of mutual funds tied to the same index.
The reason, he said, is that ETFs tend to be less aggressive when it comes to recapturing some of the costs that occur when keeping up with changes made to benchmarks.
"I suspect the ETF people don't want to get into a knock-down, drag-out competition with the other index funds," he said. "It's not in the ETFs' favor.''
Despite the lack of aggressive promotion, ETF sales appear to have spiked in the weeks following New York Attorney General Eliot Spitzer's stunning allegations of improper trading practices at many major fund companies, according to preliminary evidence from various market sources.
At Barclays, for example, $1.7 billion in new cash made its way into ETFs during the month of September, up from a net outflow of $1.3 billion in September 2002. The company blames much of last year's outflow on a withdrawal by one investor.
Still, during the first 17 days of October, $1.09 billion poured into Barclays ETFs, up nearly 13% from $969 million in the comparable period a year earlier.
As of Oct. 17, ETF assets stood at an all-time high of $127.3 billion, according to Mr. Dolan, citing data he received from the American Stock Exchange in New York. That compares to $118.8 billion on Sept. 26 and $116.7 billion on Aug. 29, he said.
Frederick P. Gabriel Jr. is a reporter with InvestmentNews, a sister publication of Pensions & Investments.