At January's Inside ETFs conference, Vanguard Chairman and CEO F. William McNabb III flagged competitors — established asset managers and startups alike — for the blistering pace of exchange-traded fund launches.
“The industry is (introducing a new) ETF, it feels like, every 30 seconds. This is like the 1980s and mutual funds. Things did not end well for all those funds,” he said.
Despite the torrent of money into ETFs, product proliferation runs the risk of watering down the message. Many argue the multipurpose utility of ETFs within investment portfolios is drowned by confusing methodologies and nomenclatures, minimal assets, poor index-tracking and marginal liquidity.
“We have to be very careful. If we go too far as an industry, people will have doubts about the original construct. And some categories are pretty esoteric,” said Mr. McNabb, whose firm manages $494 billion in U.S. ETF assets across 70 funds.
His exhortation might not be falling on deaf ears. While asset managers and advisers continue to introduce new offerings — more than 500 since the beginning of 2014, according to research firm XTF Inc. — the product set has become increasingly top heavy.
Excluding exchange-traded products featuring more short-term-oriented leveraged and inverse exposure, the 146 funds in the top decile of ETFs through March 9 held $1.7 trillion or 83% of assets, up marginally from 80.9% in 2013.
While growing assets and liquidity in the biggest and most popular ETFs actually increases their usefulness, the trend leaves a virtual cesspool of unwanted and unattended offerings. The bottom six deciles — 882 funds — held a combined $37 billion through March 9.
Todd Rosenbluth, director of mutual fund and ETF research at S&P Global Market Intelligence in New York, asks if the complexity of “minding the store” of 328 U.S. exchange-traded products involving $830 billion in assets contributed to the recent oversight by BlackRock Inc.'s iShares unit to make a timely registration of new shares in the $7.7 billion iShares Gold Trust, which has the ticker symbol IAU.
On March 4, BlackRock revealed it had inadvertently issued unregistered shares of IAU following $814 million of net flows in February. The company had to briefly suspend issuance to make the registration with the SEC, while also disclosing that, over the course of two weeks, iShares “issued and sold a total of 24,900,000 shares in excess of the total shares registered on its prior shelf registration.”
Still the appeal of the largest, broadest funds is gaining traction among institutional users.
BlackRock estimates $290 billion is invested globally in ETF managed portfolios by variable insurance trusts, mutual funds, collective trusts, institutional separate accounts and UCITs. And according to a Greenwich Associates study sponsored by BlackRock, 95% of institutional investors now use equity ETFs and 65% use fixed-income ETFs.
Moreover, S&P Global Market Intelligence's Mr. Rosenbluth said 281 U.S. ETFs trade more than 250,000 shares on a daily basis with 75% of those having a bid/ask spread of 3 cents or less. “As ETF usage climbs, we expect volume to increase for additional ETFs that can easily fit into a firm's multiasset portfolios and will help bring trading costs down for all investors,” he said.
“ETFs are a great tool for investors to access market exposures, often in transitions,” said Russell Ivinjack, senior partner with Aon Hewitt Investment Consulting Inc., Lincolnshire, Ill. “But the very specific strategies have become so niche and unique, they resemble the varied bets that can be made during the Super Bowl. It's defeating one of the primary purposes of ETFs: broad exposure for a broad strategy.”
Of course, product innovation is not dead, but the funds that have been most successful recently — mostly from existing market leaders or well-financed, name-brand new entrants and large registered investment adviser sponsors — also have been supported and seeded by major institutions or prior client assets. For example, the SPDR SSGA Gender Diversity Index ETF, with the ticker symbol SHE, launched March 8 with more than $250 million in assets, with support from the $186.1 billion California State Teachers' Retirement System.
The comments by Vanguard's Mr. McNabb, however, don't imply that the company is resting on its laurels with its current suite of products. In February, Vanguard launched international versions of its high-dividend and dividend-appreciation funds, and has regulatory filings for ETF share classes for some actively managed funds.
“We're looking at what a long-term, buy-and-hold investor needs,” said Richard Powers, head of ETF product management, for Vanguard in Malvern, Pa. “We don't explicitly seek out institutions to ask "what can we do for you,' but look for input in the course of normal client service. If there's an alignment, then eventually we can make a product happen.”
