On Wall Street: Stretching the imagination | FT
ETFs are multiplying at a dizzying rate. The funds are designed as low cost, passively managed index trackers which, unlike mutual funds, are themselves actively traded on exchanges, theoretically giving investors an easy "œin" and "œout".
By the end of February this year, $315bn was invested in US-listed ETFs, according to the Investment Company Institute. While the sector is still just a tiddler compared with the $9,200bn invested in mutual funds, the amount in ETFs has risen 41 per cent in the last year.
The sector is even big enough to have mutual funds sniffing around. The PathMaster Domestic Equity Fund is mostly invested in ETFs as a handy way of replicating market segments by size and style.
......the launches of new funds covering different asset classes is spurring on ETF product developers to find even more ways of slicing up the markets, thus moving further away from the plain-vanilla ETFs, such as the S&P trackers "“ known as SPDRs (spiders) "“ that launched the sector in 1993. It should be noted that most of the funds invested in ETFs are still held in SPDRs and their rivals......
ETF supporters have been pushing the easy diversification angle "“ that investors can buy into a fund representing an asset class, a sector or a country, such as Brazil "“ without the hassle and cost of leaving the comfort of their home markets.
But just how specific do you want to get, and is there always diversification value?
Are great leaps imminent in the derma and wound care world? Or perhaps in the respiratory and pulmonary space? These are just two of 12 suggested funds Ferghana-Wellspring has filed with the Securities and Exchange Commission.
As a rule of thumb, the more specialised the ETF, the less liquid its trading will be since, logically, it will attract less interest, and bid/offer spreads will be wider. So investors could find that the easy exit promised by exchange trading still comes at a cost.
And there"™s potentially another side effect, the impact of the fund on the underlying asset in less liquid sectors. In some cases, ETFs already seem to have taken over from hedge funds as the catch-all reason used to explain particular price moves.
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