Why We Need A Thriving ETF Industry

A few days ago iShares listed the iShares All Peru Capped Index Fund (NYSE: EPU). It was one of two Peru ETFs in registration. The other is from GlobalX which currently only has one fund trading which is the Interbolsa FTSE Colombia 20 ETF (NYSE: GXG). GlobalX has also filed for ETFs covering Argentina, Egypt and the Philippines.

So far the Colombia fund as only been averaging 3000 shares traded per day. The timing of the fund was pretty good, it came out in late February close to the low and has captured the rally that has occurred in emerging markets since then. There are a couple of reasons that could account for the lack of traction. One less likely might be that despite Colombia being a commodity destination the fund is heavy in financials and another more likely reason is that most advisors and do-it-yourselfers are not yet comfortable with narrow products.

I believe over time that the investing public will make the effort to learn how to use narrow out of necessity if the US and Western Europe continue to disappoint.

In launching EPU I think iShares was taking direct aim at GlobalX. For being brand new and so narrowly focused, EPU has had decent volume. Of course iShares can afford to give a small fund like EPU ample time to gain traction. I have no idea how deep GlobalX’ pockets are but they are not as deep as iShares and I would be very surprised if a me too fund for Peru could have much luck in the market place even if the construction of the fund turns out to be superior.

This shows, IMO, the extent to which the ETF industry is becoming increasingly more competitive which hopefully results in more choice and more quality. If you look at the iShares web site you will see a lot narrow based funds that isolate some interesting themes such as timber, two different infrastructure funds, nuclear and alternative energy. Other providers too cover most of these areas.

These funds create the opportunity for investors to create very sophisticated equity portfolios without having to pick stocks. Generally the portfolio dynamics I’m talking about can be created with individual names but many folks are uncomfortable doing that.

The next frontier that I hope the industry really gets into is fixed income. There are some interesting funds to be sure but I believe there is more that can and will be done in the next couple of years.

I can envision where portfolio construction and market navigation will become much more difficult than simply buying three different index funds and calling it a day. This will be made easier by a more developed ETF industry.