Commercialization and Strange ETF Indexes - dummies

Commercialization and Strange ETF Indexes

By Russell Wild

Innovation is a great thing. Usually. In the world of exchange-traded funds (ETFs), a few big players (BlackRock, State Street Global Advisors, Vanguard) jumped in early when the going was hot.

Now, in order to get their share of the pie, a number of new players have entered the fray with some pretty wild ETFs. “Let’s invest in all companies whose CEO is named Fred!” Okay, there’s no Fred portfolio, but the way things are going, it could happen.

It makes sense for ETFs to follow indexes that make sense. And their expense ratios should be low. At present, plenty of ETFs carry expense ratios of 0.20 percent or less.

Some of the newer, more complicated ETFs, however, have expense ratios edging up into the ballpark of what you usually see for mutual funds. There are now several dozen ETFs charging 0.75 percent a year or higher, and at least six carry net expense ratios of 1 percent or more.

Not all ETFs must necessarily follow traditional indexes. The ETF format allows for more variety than that. But the ETF industry has lost some of its integrity over the past few years with higher expenses and some awfully silly investment schemes.