Are ETF’s contracting Mutual Fund-itis?
Million Dollar Journey had a great summary on international dividend etf’s earlier this week. What struck me more than anything else was the fee creep in certain ETF’s. Three of the ETF’s he listed had MER’s equal to or greater than 0.60%. I also noticed that one of Claymore’s newest ETF’s- the NYSEArca Airline ETF (…to paraphrase Buffet, if you want to be a millionaire start as a billionaire and invest in an airline…) has an expense cap of 0.65%. Didn’t ETF’s use to have MER’s of 0.50% and under?
Leave it to the financial industry to take something simple and overly complicate it and layer it with fees. EFT’s are only great products if: (i) fees are low; and (ii) they have low turnover in their portfolio for tax efficiency. But there appears to be creeping mutual fund-itis in the ETF industry mainly characterized by higher fees, complicated and, arguably, unnecessary product lines (an ETF that tracks airline stocks? What was the product development department smoking that day and can I get some of that?) and active management of ETF’s.
One of the most egregious of these offenders appears to be an actively traded ETF with a 0.70% MER and a 0.20% potential bonus to the manager. As Canadian Capitalist reported, this ETF appears to be a mutual fund in ETF’s clothing.
Will this trend get worse? Of course it will. Given that ETF’s are taking market share away from mutual funds, the financial industry is jumping in and shifting mutual fund executives to the ETF industry. The playbook then is increasingly becoming the same as the mutual fund industry- spend vast amounts of money on marketing and sales (read: higher MER’s), create new and “innovative” products (read: hard for the average investor to understand beyond the hype) and begin to actively manage what was supposed to be a passive product (and we know how well the financial industry handles complicated financial instruments don’t we?). In the industries defense, there are new ETF’s who continue to issue low MER products but there’s an increasing number of ETF’s with mutual fund-itis.
As investors, we have to adhere to the KISS principal. Ignore the noise and look for ETF’s that maxmimze the advantages of this product: low fees and broad based converage of equities/fixed income markets. Chasing product outside this criteria undercuts the fundmental advantages of investing in an ETF.