From the November 2006 issue of Research Magazine • Subscribe!

Still a Bustling Market

Investors have gotten used to a steady supply of new ETFs, and the third quarter didn't fail to match their expectations. Fund categories that saw the most activity included currency, specialty and sector-related funds.

In fact, the industry and sector area closed the quarter with 97 funds, making it the largest ETF category. The expense ratio average of this group increased slightly from 0.43 percent to 0.45 percent. September alone saw PowerShares Capital Management add nine sector funds to its product line; all of them carried higher ratios of 0.60 percent. By contrast, the Select Sector SPDRs and the Vanguard Group's lineup of sector ETFs led the industry with the lowest expense ratios in the category.

The "specialty" group is a new ETF category composed of funds with specialized strategies. The category is currently dominated by ProShares, which has created a dozen ETFs that make use of leverage and short strategies in order to generate results that diverge from the performance of various key stock market indexes. In an August SEC filing, ProShares indicated that it is planning to launch no less than 66 more specialized ETFs that utilize sophisticated short and leveraged strategies. As it happens, the 0.88 percent expense ratio average for this group is the highest among all ETF categories.

The fixed income universe, fielding only 6 funds, remains one of the smallest ETF categories. Compared to other groups, this particular category had the lowest average expense ratio, coming in at 0.17 percent.

With eight funds and counting, currencies are a relatively new and more robustly expanding ETF category. Rydex Investments, an early leader in this arena, manages six funds known as "CurrencyShares" that track individual currencies from Australia, the U.K, Canada, Mexico, Sweden and Switzerland. All of the funds have expense ratios of 0.40 percent.

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Expense Ratio

ETF CategoriesCategory AverageNumber of ETFs

Broad Market 0.35 %21

Large Cap 0.28%35

Mid Cap0.28%21

Small Cap 0.35%26

Industry & Sector 0.45%97

Global & International 0.50%59

Emerging Market 0.61%10

Fixed Income0.17%6

Commodity0.56%6

Currency0.35%8

Specialty0.88%15

Industry Average/Total0.43%304

Source: ETFguide.com

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