Exchange-traded funds become too specialised
THERE comes a time when every financial innovation is taken a bit too far—when, in television terms, it “jumps the shark” and sacrifices plausibility in search of popularity. That may have happened in the exchange-traded fund (ETF) industry. The latest ETF to be launched is a fund that invests in the shares of ETF providers.
The notion has a certain logic. The ETF industry has been growing fast, thanks to its ability to offer investors a diversified portfolio at low cost. The assets under management in these funds passed $3trn last year, up from $715bn in 2008. Some investors might well want to take advantage of that rapid expansion.
But by no stretch of the imagination would this be a well-diversified portfolio; it would be a focused bet on the financial sector. And many of the companies in the portfolio, such as BlackRock, a huge fund manager, and NASDAQ, a stock exchange, are involved in a lot more than just ETFs. Even if the ETF industry keeps growing, the bet could still go wrong.
The new fund (with the catchy title of the ETF Industry Exposure and Financial Services ETF) is just the latest example of the industry’s drive to specialisation. The…
