As more and more traditional fund firms are entering the ETF market and issuing new products, the market is driving down prices. Vanguard has fueled a price war in the United States by issuing 20 new ETFs undercutting Black Rock and others, Bloomberg reports today:

“Vanguard’s U.S. ETFs pulled in a net $25.6 billion this year through Sept. 30, 26 percent more than BlackRock and State Street combined, according to Chicago-based Morningstar Inc. Vanguard last month offered 20 new ETFs, taking on the bigger companies for the first time with funds that track Standard & Poor’s and Russell indexes, including the S&P 500 Index.(…) Fees charged by BlackRock and Boston-based State Street, which oversees $216 billion in ETFs, are on average about double those of Vanguard and Schwab of San Francisco.”

But competition drives also innovation. The latest thing being bullet bond ETFs, as read in today’s Wall Street Journal:

“One of the exchange-traded-fund industry’s latest innovations aims to answer a longstanding criticism of bond mutual funds: that these investments never mature and so investors can’t lock in attractive yields as they can with individual bonds. Two ETF providers, BlackRock Inc.’s iShares unit and Guggenheim Partners LLC, have begun offering “end-date” or “bullet” bond ETFs in the past year. The new funds hold a portfolio of bonds all maturing in the same year.”

This seems to me among the more sensible innovations in the ETF market. It’s reassuring to see that in some areas of the financial services world market forces actually do work.

About two weeks ago a small research firm in Boston, Bogan Associates, published a piece titled “Can an ETF Collapse?”. It basically argued that because some (US-based) ETFs are heavily shorted, in a market crisis the fund sponsors may stop redeeming fund shares as there have been many more ETF shares created through short selling than have been actually covered through underlying equities by the sponsor.

CNBC’s Herb Greenberg picked the story up and the report was also published on Seeking Alpha, an influential financial blog. Within hours a storm broke loose in the blogosphere but also mainstream media found themselves in heavy debate whether it was possible that the whole ETF market can face an Armageddon-like meltdown scenario. Morgan Stanley in London voiced that the Bogan report was actually bogus and IndexUniverse, an Internet platform mainly concerned with index investing, also criticized the doomsday scenario. Leading fund research firm Morningstar had to put out a long article that explained the mechanics of creating and shorting an ETF in order to highlight that it was impossible for an ETF to collapse via its short interest.

So what is our take? It seems that heavy short selling of ETFs is mainly a US problem and the severe cases are limited to a few specific funds. Also, given the market mechanics of shorting, that kind of scenario should mainly create problems for the shorters (”short squeeze”) but definitely not for the regular long-only retail investor. Yet, undoubtedly the whole debate shows that the rapid growth in ETFs has created some market practices that should be monitored very closely by market participants and financial authorities. We are convinced that ETF risks are  not in the shorting of an ETF but in various other market developments we have highlighted in a recent report on ETF risks.

The Wallstreet Journal dispenses some advice which we like a lot:

“Investing is complex rocket science that requires professional help-at least that’s what the professionals usually say. But a strong case can be made for investors following a design principle known as KISS, which in this case stands for: Keep it simple, saver…”

Highly recommended reading - especially for the investor who is seeking peace of mind…

The guys from Passive Investing in Geneva have just published a short but on-the-spot new DIY-guide to passive investing. It’s worth the read if you are toying with the idea to get into passive investing or if you would like to review your investment approach. Make also sure to read the MyPrivateBanking-Guide on ETF Risks. If you follow the advise of these two papers, your investment performance will probably beat 95% of conventional wealth managers…

Today I read the following:

“The actively managed exchange-traded-fund market is expected to explode as top mutual fund companies, including Putnam Investments, John Hancock Funds LLC, T. Rowe Price Group Inc. and Pacific Investment Management Co. LLC, consider entering the business or expand their lineups.The number of actively managed ETFs is likely to rise from the current 15 to more than 40, while the number of providers offering such funds could go from seven to 15, according to Rob Ivanoff, an ETF analyst at Financial Research Corp.”

Hmmmm….I used to think that the big point of ETFs is the passive index tracking most of them are following resulting in very low fees for the investor and an index matching performance? It seems that some fund firms think that they can use the label “ETF” as a marketing tool to sell old wine in new skins. Would these “active ETFs” perform better than their active mutual fund clones? Certainly not. Would they be cheaper? We don’t think so. Probably the only plus for investors would be the stronger transparency as holdings have to be disclosed daily.

Well, one thing seems to be certain - the mutual fund industry never runs out of ideas to protect their hefty fees…

“Calculation of performance is based on the time-weighted return and excludes front-end fees. Individual costs such as fees, commissions and other charges have not been included in this presentation and would have an adverse impact on returns if they were included.”

That’s the typical wording you find in the fact sheet of your common mutual fund. Ok. Let me get this straight. If  that fund company would be a car manufacturer they would say the total yearly costs of running this car is x dollar. And in the small print they would state: Costs are calculated without taking in account fuel, repairs, maintenance and the cut the dealer gets for selling the car.

Right ! What is next? Fund performance measured by taking out all years with double-digit losses? I understand that the fund industry feels the heat from the ETFs that deliver the same or better performance at a third or less of the costs. But this kind of “creative” fire-fighting adds to the frustration about funds as an investment vehicle in general. It’s time to change the rules and include ALL cost in the performance calculation of a fund.

Last Friday I promised to check through all the ETF tools listed here. I did. And here is my very subjective Top-3-list:

Nr. 3: The ETF-map by finviz.com. Looks extremely cool and is extremely informative. Though it is somewhat US-centric.

Nr.2: The ETF-screen by etfscreen.com. You can screen ETFs by an unmatched multitude of criteria (I counted 38!). Not extremely user friendly, however - you have to spend some time understanding all the acronyms.

Nr.1: The Bloomberg ETF screener. Relatively simple but includes ETFs listed in 20 countries. Great global reach!

Attention all index investors! Today I came across a page with a very valuable list of online ETF tools. On first glance, it seems that most of the tools are focused on the US market. I will check them over the weekend and condense a list of my favourites with some European additions.

One of the last developments of the crazy tech stocks boom in 2000 was that banks started to launch very exotic funds on internet stocks. After stocks in traditional markets already went up tenfold and more a new “story” had to be invented: That of still “undervalued” tech stocks in “undervalued” regions. Shortly after the world of triple digit price/earnings-valuations collapsed these funds vanished for almost a decade.

However, just in time for the ten year anniversary of the dot.com-bubble Deutsche Bank launched last week an ETF on Chinese internet stocks. It is correct that neither internet stocks nor China are for investors a foreign territory as they used to be 10 years ago. Because of this familiarity with internet stocks investors nowadays do not accept missing of business models. Consequently, the upside of internet stocks is limited in many cases anyways. But unlike in 2000 this fund is launched in the middle of one of the world’s worst economic crises and not at the end of a bubble.

What does this tell me? Stock markets show cycles and these are about to be repeated. I cannot predict when and in which area the next bubble will build up, but I sure will look out carefully for the launch of funds on “Vietnamese e-commerce stocks”, “Bolivian coffee farms” or “Namibian solar parks”…

PS: With an annual 1.5% management fee the Chinese internet ETF is very expensive. Looks like the bankers thought an exotic ETF can demand an exotic pricing as well. Anohter indication that ETF does not automatically mean low fees.