ETF moderation

02Feb08

The rapid, sometimes pell-mell, growth in the ETF industry has been a frequent topic here at Abnormal Returns. It now seems that we are beginning to see a slowing in the race for shelf space. From Diya Gullapalli at WSJ.com:

In one of the earliest signs of the shakeout unfolding in the hotly competitive exchange-traded-fund industry, Claymore Securities Inc. announced Friday that it has decided to shut down nearly a third of its 37 funds.

Tom Lydon at ETF Trends notes the ‘responsible nature’ of the fund closures. He makes an excellent point in that the traditional open-end mutual fund industry should have been much more proactive in shuttering underperforming funds.

Matthew Hougan at IndexUniverse.com explores in greater detail the practical considerations of the closures for fund shareholders. It is inevitable that there will be speculation that other low asset ETFs may liquidate in the future.

Murry Coleman also at IndexUniverse.com weighs in on the Claymore liquidation finding it a bit of a “yawner.” Coleman also echoes some of our own thoughts:

In any case, there’s little doubt that this liquidation should serve as a heads-up to investors. There’s real danger in this wildly expanding market for people choosing to plunk down money on an ETF without fully understanding how its underlying index works.

Our fear, many moons ago, that ETF sponsors would let these funds languish, creating a class of ‘orphan ETFs.’ Fortunately for those investors still in these funds they will soon receive the proceeds from the liquidation, thereby avoiding the hard decision of whether to sell.

In short, our advice remains the same. Just because some one comes up with a novel ETF idea, does not mean you need to rush out and purchase it.

For those of you still reading, you are probably keenly interested in the world of ETFs. We recently came across a cool site, ETF Screen, that does exactly that. It allows you to quickly and easily view the performance of various ETF categories. Definitely worth a look. Thanks to Bill Luby at VIX and More for pointing it out.

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