Great article on ETFs ("Ingenuity Risk, May, page 54). Well-presented with no bias. This is what is always needed when articles are written for the consumption of individuals and professionals alike. Keep up the great work!
The mutual fund business will continue doing well until the older brokers--my age 59--begin to retire. Many of these brokers primarily derive a high percentage of their salary on the 12b-1 fees mutual funds provide. When these well-seasoned brokers go to pasture, the mutual fund will lose much of its allure. The newer brokers are gravitating to the ETF and this will cause the ETF to gain much more sponsorship in the days and weeks ahead.
We manage the PDP ETF, which is the first Technical Analysis-based ETF from PowerShares. On our site, we provide what we call a peer relative strength chart where each mutual fund is compared to its unmanaged ETF. This chart suggests whether the mutual fund manager is bringing enough value to consider paying the added costs to have him. Many mutual funds are worth the extra money, and that's fine. The neat part is. we have a way of determining this. What this whole ETF proliferation means is that this "fire hose" of information must be managed and reduced to the trickle of a "garden hose." It's a learning curve, and if an investor has no way of understanding how to manage the information, he is best left to a simple index like the SPX and be done with it.
The mutual fund industry with 13,000 funds, most of which never outperform the SPX, is no panacea either. There are few funds that consistently do well, and one is Dodge & Cox. With this one group you can eschew all the rest. The problem individual investors have is either learning the craft of managing this information or finding a broker who can do it, and finding this broker well versed in managing ETFs can be as daunting a task as doing it themselves.
Our clients are very up on it, but most brokers/advisors/planners are not. Many use the computerized Monte Carlo simulation strategic allocation models. This simulation simply gives the client a pie, populates it with in-house mutual funds and re-balances twice a year. This is no way to manage, and in fact, is a sure way to under-performance.
We are in a new world now that is "flat," as Thomas Friedman would say. eTrade will shortly allow investors to invest direct internationally. This is going to open the world for business but again, the learning curve will be steep. But no matter how steep, it must be met. These are incredibly interesting times and each day brings something new. Get ready for some fun times in the future. Keep up the great work.
Dorsey, Wright & Assoc.