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Fund Spy

The Great ETF Land Rush

Are ETF launches spinning out of control?

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History says that land rushes are not pretty. There are scams, panic, and lots of tears and above all a headlong rush to mark out some space--any space. The Great Exchange-Traded Fund Land Grab is no exception. True, we haven't seen any true scams yet, but we have seen plenty of really, really bad ideas that no prudent investor would touch. That's a shame, because there are also some very good long-term investments in the ETF set.

In contrast to the ETF sector, the conventional mutual fund industry learned important lessons from the bear market. Companies learned that launching trendy funds aimed at whatever has already gone up leads to burned investors, and angry investors and advisors will blame the fund company. Thus the conventional fund industry has eased back on cynical launches of those sorts of funds. It has also shifted away from other sales tactics that bring short-term cash and long-term grief such as hyping short-term performance. Yet, though ETFs are funds and some big ETF companies are also big fund companies, those rules haven't applied in the ETF space.

The Importance of Being First
Why the frenzy of bad ETF launches? One reason is that being first in a space usually ensures that an ETF will be the most heavily traded even after other entrants join in. That's because short-term traders care more about an ETF's trading volume than expenses or other issues as they want to get in and out quickly and at a good price. That means volume is key.

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Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.