Nearly 120 exchange-traded funds have launched in 2018, averaging out to more than one new fund a day, and building on the 466 that debuted globally over the course of 2017.
The seemingly nonstop popularity of ETFs, along with the endless march of funds coming to market, has brought the total number of ETFs to 5,430, according to research firm ETFGI, which noted that there’s another 1,907 exchange-traded notes that are also available for investors to consider.
The sheer number of options out there means there are products offering exposure to basically every conceivable asset class, region, strategy, and sector of the market. Given that, investors might reasonably ask: are there any ETFs that aren’t out there that should be?
According to one informal poll: no, for the most part.
Abnormal Returns, a financial blog, polled 22 investors and finance experts on whether there were any ETFs that, if launched tomorrow, they’d “invest in with little (or no) hesitation.” By far, the most popular answer was that all needs were currently being met.
In representative responses, Michael Batnick, director of research at Ritholtz Wealth Management LLC, said “I’m content” with what’s already available, while Nick Maggiulli, who writes the blog Of Dollars and Data, said “Nothing comes to mind. Then again, my investment choices are quite vanilla.”
And most investors take a vanilla approach to using ETFs, which hold a basket of securities like a mutual fund, but price and trade intraday like a stock. By far, the three largest ETF sponsors —
iShares, Vanguard, and State Street Global Advisors
, which has the SPDR family of funds — all specialize in broad-market passive vehicles with rock-bottom fees. The three sponsors together account for 70% of the global ETF marketplace, and more specialized or complex vehicles have generally struggled to amass much in assets or see notable trading volume. For this reason, the rise in fund launches has coincided with a rising number of fund closures.
For more information: How the ETF market is both growing and shrinking, in one chart
Cullen Roche, the founder of Pragmatic Capitalism, wrote that “the ETF market is becoming saturated,” adding that “most of the new strategies are gimmicky nonsense being sold to people who think they need something they don’t.”
Roche didn’t provide example of funds he would put into that category, but “thematic” ETFs have been among the most common launches of late. These products offer exposure to an extremely niche sector of the market, such as companies that deal with weight-loss issues, as with the Obesity ETF
In 2018, two funds related to blockchain — the decentralized ledger technology that the digital currency bitcoin runs on — debuted on the same day. Another fund, launched in December, had its components selected by artificial intelligence.
In something of a tongue-in-cheek answer, Phil Huber of Huber Financial Advisors requested a fund “that capitalizes on the most consistently accurate contrarian indicator known to mankind – Dennis Gartman,” referring to the editor of the institutional advisory service The Gartman Letter.
In February, Gartman, a prominent critic of cryptocurrencies like bitcoin, revealed his portfolio had gambled on a company related to blockchain and suffered “one of the worst days” when it swooned.
“The Inverse Gartman ETF would provide investors a transparent, rules-based way to take the opposite bet of whatever Gartman is bullish or bearish on that week on CNBC,” Huber wrote. He even suggested a ticker symbol: WRNG.
Overall, 10 of the 22 respondents said there weren’t any funds they’d immediately jump into, although some couched this view by saying even if there was a new fund that appealed to them for its strategy, they’d want to see it develop a track record and amass assets and liquidity before they considered it.
There were a few sincere blank spaces cited by the poll’s respondents. Morgan Housel of the Collaborative Fund called for “comprehensive allocation to every asset class weighted by that country’s share of global GDP,” a strategy he dubbed the “World Fund.”
Among more sophisticated ideas, Jeffrey Miller, chief executive officer of NewArc Investments, said “a legitimate area for ETF development” involved offering access to short-term trading strategies that weren’t tax efficient normally. “An example would be a Pairs Trading strategy,” he wrote, referring to a market-neutral investment process that matches a long position in one security with a short position in a pair of highly correlated other securities.
Wesley Grey, chief investment officer of Alpha Architect, called for “a tax-efficient, leverage-efficient, trend/carry managed futures ETF,” although he suggested it would be “impossible to create” as an ETF.
One notable part of the financial system that doesn’t have a dedicated ETF involves bitcoin
and other cryptocurrencies. A number of fund sponsors had attempted to bring such a product to market, but were rebuffed by the Securities and Exchange Commission, which cited how unregulated the market was.
Only one of the poll’s respondents cited this asset class as pace that should be serviced by the investment vehicle, although it wasn’t because he was bullish on crypto.
“Something that offered access to cryptocurrencies beyond bitcoin would keep money in the brokerage firm realm as opposed to people sending money to unregulated financial companies which opens the door to investors exposing their money to institutional risk,” wrote Roger Nusbaum, ETF strategist for AdvisorShares. “Not that the cryptos themselves can’t go poof but the risk of holding an ETP at Schwab or Fidelity is much less than a crypto-only shop that’s only been open for a year.”