Are ETF’s contracting Mutual Fund-itis?

Posted by on February 12, 2009 in Investment Products

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.

7 Comments on Are ETF’s contracting Mutual Fund-itis?

By Million Dollar Journey on February 12, 2009 at 9:32 am

Great post TMW. It’s true, some of the “fancier” ETF’s are getting fairly expensive. Best to stick to the ones that track the major indices. Some of the vanguard dividend etf’s have lower mers than the rest in the 0.25-0.30% range.

By CanadianInvestor on February 12, 2009 at 8:47 pm

Excellent point. Some people seem to think there is something magical about ETFs such that they are all passive indexed products. Not so, as you point out. ETFs are just a legal structure for a security.

By Friday Links | The Canadian Finance Blog on February 13, 2009 at 8:17 am

[...] Thicken My Wallet points out a disturbing trend of higher fees in certain ETFs. [...]

By Canadian Capitalist on February 13, 2009 at 9:06 am

Thanks for the link Thicken. You can rely on the financial industry to take advantage of what is popular to sell product. They know that investors are getting interested in ETFs, so they are going crazy making more and more of them that make very little sense for most investors.

By Manshu on February 18, 2009 at 8:49 pm

I think the convenience of ETFs over Mutual Funds makes people prefer them. This is now gradually being exploited and the general public needs to be made aware of this.

By Interesting Reads - 21st Feb | OneMint on February 21, 2009 at 4:09 am

[...] 5.  Are ETFs contracting Mutual Fund – itis by Thicken My Wallet: Thicken My Wallet discusses how ETFs are complicating stuff and layering them with fees. [...]

By Thicken My Wallet » Blog Archive » How to avoid the pitfalls of exchange traded funds on September 15, 2009 at 5:05 am

[...] mused early this year whether exchange traded funds (ETFs) were contracting mutual-fund-itis: a product mangled by the excesses of the financial [...]

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