Introduction to Exchange-Traded Fund (ETF) Suppliers - dummies

Introduction to Exchange-Traded Fund (ETF) Suppliers

By Russell Wild

Fewer providers of exchange-traded funds (ETFs) exist (currently 48) than mutual fund providers, they tend to be larger companies, and the top four providers (BlackRock, State Street, Vanguard, and Invesco PowerShares) control 92 percent of the market.

In large measure this is because ETFs’ management fees are so low that a company can’t profit unless it enjoys the economies of scale and multiple income streams that come from offering a bevy of ETFs.

While picking a single brokerage house to manage your accounts makes enormous sense, there is no reason that you can’t own ETFs from different sources. Like your favorite professional sports team or clothing store, each supplier of ETFs has its own personality.

A portfolio with a combination of BlackRock, Vanguard, and State Street ETFs can work just fine. In fact, you may have more success not wedding yourself to a single ETF supplier but being flexible and picking the best ETFs to meet your needs in each area of your portfolio.

Note that brokerage houses typically do not sell every available mutual fund. But rarely will a brokerage house limit which ETFs it will sell. The reason is simple: When you buy or sell an ETF, you pay a trading fee directly to the brokerage house. The more ETFs they can offer, the merrier.

When mixing and matching ETFs, beware that you don’t want holes in your portfolio, and you don’t want overlap. Mixing and matching, say, a total U.S. stock fund from one ETF provider with a European stock fund of another provider would be just fine because there’s virtually no chance for either overlap or gaps.

However, in putting together, say, a U.S. value and a U.S. growth fund, or a U.S. large cap and a U.S. small cap fund, in the hopes of building a well-rounded portfolio, you may want to choose ETFs from the same ETF provider, using the same index providers (Russell, Morningstar, S&P, and so on).

That’s because each indexer uses slightly (and sometimes not so slightly) different definitions of “value,” “growth, “large,” and “small.” So mixing and matching funds from different providers may be less than ideal.

Company Number of ETFs Average Expense Ratio Claim to Fame
BlackRock iShares 222 0.42 Biggest variety of funds
State Street Global Advisors 100 0.35 Oldest and single-largest ETF
Vanguard 65 0.18 Sensibility and economy
Invesco PowerShares 120 0.60 Quirky indexes
ProShares 119 0.95 Woooeee . . . High volatility with leveraged and inverse
Van Eck 35 0.60 Alternative investments galore
WisdomTree 50 0.52 Dividend mania