From the January 2007 issue of Research Magazine • Subscribe!

Flooding the Market

In the fourth quarter of last year, ETFs continued to flood the market at a dizzying pace, with no less than 40 new funds launching by the end of November. Meanwhile, expense ratios were flat to only modestly higher.

The Industry & Sector category exploded from 97 to 120 funds over the previous quarter. The average expense ratio of this group increased slightly from 0.45 percent to 0.47 percent. Notable new launches included 11 sector funds from PowerShares Capital Management that carry ratios of 0.60 percent and nine funds from Rydex with ratios of 0.50 percent.

The Specialty group, with an average expense ratio of 0.86 percent, had the highest average expenses among all ETF categories. As its name implies, this group consists of funds with specialized strategies. It's dominated by ProShares, which has 12 ETFs that use leverage and short key stock market indexes. In a fall SEC filing, Rydex Investments indicated that it's planning upward of 96 specialized ETFs that will no doubt add to the category's growth once they're introduced.

With only six funds, the fixed income universe remains one of the smallest ETF categories. As befits its underlying asset class, this particular category also had the lowest average expense ratio, coming in at 0.17 percent.

The broad market category contains 22 ETFs that track broadly diversified stock indexes. Familiar names in this category include the Nasdaq-100 (NASDAQ: QQQQ) and the streetTRACKS Dow Jones Wilshire Total Market (Amex: TMW). The Vanguard Total Stock Market ETF (Amex: VTI) had an expense ratio of 0.07 percent, the lowest among all broad market ETFs.

Merrill Lynch's HOLDRs were omitted because their cost is not expressed in terms of expense ratios.

Ron DeLegge is editor of www.etfguide.com.

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