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There's No ETF for Sour Grapes
10/05/2011 8:30 am EST
ETFs have been getting a bad rap recently, but it's undeserved, argues Todd Shriber of Global Profits Alert.
I wasn't around when the movie Cool Hand Luke came out, but my mom loves old movies and she always had them on when I was a little kid.
To this day, I remember her renting Cool Hand Luke not long after my family got its first VCR in 1985. And like many of you that have seen this classic film, one line stands out in my mind: "What we have here is a failure to communicate."
No, today's column will not be devoted to classic American cinema. I'm continuing my commitment to parsing through what I believe are inaccurate or misinformed statements regarding ETFs.
Now let me be clear and say that when I do this, I have absolutely no personal grudge against anyone that doesn't like ETFs as much as I do. Different strokes for different folks, I say. I also say everyone is entitled to their own opinion...but not their own facts.
A recent column on MarketWatch notes, "There are around 1,350 ETFs today, and hundreds more in registration." As I interpret it, this column seems to take issue with the number of ETFs on the market today by taking a backhanded shot at ETFs that focus on corn or Bulgaria.
I had to laugh. No one complained to me when we hit a 10% winner in the Teucrium Corn ETV (CORN) and according to ETFdb's country exposure tool, there isn't a single ETF currently offering exposure to Bulgaria.
The column goes onto say "Most investors really don't need a fund that leverages a segment of the market, or specializes in commercial real estate in a single foreign country. They may want to own gold, but they don't necessarily need the volatility that comes from an ETF that only invests in junior gold-mining stocks."
Again, that's pure opinion. In fact, there is no empirical evidence to suggest that there's a small market for leveraged ETFs or niche products.
And while the mythical "most" may not have any use for the Market Vectors Junior Gold Miners ETF (GDXJ), someone apparently does. The ETF has over $2.1 billion in assets under management, and average daily volume of 3.56 million shares.
Sure, at the current time "most" investors may not need a leveraged ETF, but as we all learned at an early age, need is far different from desire. Again, none of our subscribers complained when we recently hit a 20.5% winner in the ProShares UltraShort Brazil (BZQ).
Since I'm a gentleman, I'll meet the columnist halfway and say there are too many low-asset, low-volume exchange traded products out there. Still, 1,350 funds pales in comparison to almost 7,600. That was the number of US mutual funds at the end of 2010, according to the Investment Company Institute.
If we're talking numbers, then far too many mutual funds remain in business. That theory is borne out by
the stats—64% of large-cap mutual funds lagged the S&P 500 last year, according to MarketBeaters.com.
The S&P 500 returned an average of 8.4% between 1988 and 2008, and only 21 of 57 mutual-fund families outperformed the index during the same period. The S&P 500 beat 75% of actively managed mutual funds from 2002 to 2007, MarketBeaters notes.
Of course, it needs to be remembered that, assuming the statistic is true, 75% of mutual-fund managers underperform their benchmark index in an average year. That doesn't mean there's too many ETFs, though it could mean the mutual-fund universe could be trimmed by 5,700 funds and investors would be better off.
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