Market Pulse: This is getting ridiculous
August 12, 2013
The growth of Exchange-Traded Funds (ETFs) has been nothing short of phenomenal, and there are nearly 1300 ETFs with assets totaling $1.4 trillion. Financial companies that introduced ETFs early have done very well. Latecomers are finding it more difficult.
Fidelity announced that they will introduce 13 passive sector ETFs. With State Street and Barclays dominating this space it's hard to imagine Fidelity's funds gaining traction. Franklin Templeton plans to offer a short duration U.S. Government ETF. Talk about late to the party!
Fidelity and Franklin Templeton may succeed to some degree because of their name recognition. Others entering the ETF arena are attempting to gather assets by offering unique investing ideas, in fact so unique that some are bordering on the ridiculous. Here are three:
• IndexIQ must have noticed the success of the physical gold ETF so they filed to offer a physical diamond ETF. Diamonds aren't like gold, however. Some diamonds are worth more than others. I don't see a viable way for them to value the diamonds in their vault as they constantly buy and sell diamonds as investors trade the ETF. Investors won't know what the portfolio is worth.
• The best example that the ETF space is saturated is LocalShares Nashville ETF, which has filed to offer a fund that tracks publicly traded companies headquartered in Nashville. Really?
• Finally, Winklevoss has filed to offer a Bitcoin ETF. Bitcoin is a virtual currency used by some merchants, but it is not backed by any country or central authority. Bitcoins are ripe for fraud. In fact, the SEC is warning investors about the potential for Ponzi schemes involving Bitcoins. I don't expect this fund to be approved.
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Many new ETFs are coming to the market. At the same time other ETFs are closing down due to lack of interest. The ETF space is crowded and it is getting harder to successfully launch an ETF.
I prefer to own the largest ETFs. They offer the best liquidity.
— David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.