The Boston Globe reports on the ridiculous number of new exchange traded funds being launched this year:
Exchange traded funds, or ETFs, have attracted hundreds of billions of dollars as an alternative to mutual fund investments in recent years. Mutual funds still pull in much more client money than exchange traded funds, but ETFs have established themselves this decade as competitive products that appeal to many investors. Their assets, just $130 billion at the end of 2003, had grown to $480 billion by May.
Investment management companies have responded to that kind of demand by burying investors in new products. A total of 150 new ETFs were created in the first five months of this year, according to research by the industry's two largest competitors. That's almost exactly the number of all the new ETFs created during the entire year in 2006, and three times the number formed in 2005. About half of all ETFs on the market today have arrived in the past 12 months."
This plague of ETFs brings to mind an important point about fund companies: they don't launch investment vehicles because they think those vehicles are particularly likely to perform well. In fact, we'd wager that most of the funds started by fund companies are not expected by their managers to be top performers. That's because fund companies are interested less in their funds posting big returns as they are with getting investors to buy them.
Fund investors usually make investment decisions based on recent past performance. Most of the time the new mutual funds and ETFs that are the most saleable are not the ones that are set to post big gains in the near future but those that are in the hottest categories. So what if study after study shows that funds that are top performers rarely remain so? As long a performance chasing investors are buying, the fund companies will be selling.
The Boston Globe reports on the ridiculous number of new exchange traded funds being launched this year:
Exchange traded funds, or ETFs, have attracted hundreds of billions of dollars as an alternative to mutual fund investments in recent years. Mutual funds still pull in much more client money than exchange traded funds, but ETFs have established themselves this decade as competitive products that appeal to many investors. Their assets, just $130 billion at the end of 2003, had grown to $480 billion by May.
Investment management companies have responded to that kind of demand by burying investors in new products. A total of 150 new ETFs were created in the first five months of this year, according to research by the industry's two largest competitors. That's almost exactly the number of all the new ETFs created during the entire year in 2006, and three times the number formed in 2005. About half of all ETFs on the market today have arrived in the past 12 months."
This plague of ETFs brings to mind an important point about fund companies: they don't launch investment vehicles because they think those vehicles are particularly likely to perform well. In fact, we'd wager that most of the funds started by fund companies are not expected by their managers to be top performers. That's because fund companies are interested less in their funds posting big returns as they are with getting investors to buy them.
Fund investors usually make investment decisions based on recent past performance. Most of the time the new mutual funds and ETFs that are the most saleable are not the ones that are set to post big gains in the near future but those that are in the hottest categories. So what if study after study shows that funds that are top performers rarely remain so? As long a performance chasing investors are buying, the fund companies will be selling.
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