State Street Global Advisors started the ETF craze when it launched the first ETF, the SPDR, back in 1993. The company launched 12 new ETFs last year and is continuing to expand its ETF Empire into 2007. Jim Ross is the head of State Street's ETF business and helped develop that first exchange traded fund more than a decade ago. He joins the guys to discuss what’s next for ETFs.
Jeff Macke and Pete Najarian are critical of some ETFs, saying the sector funds don’t always represent the index that they’re said to.
“For the most part, they are giving you the exposure,” Ross says. He believes the majority of the funds represent their indexies “relatively well,” they just have to keep up with meeting the diversification requirements of the IRS and SEC.
Perhaps the biggest threat from the emergence of the ETF has been to the mutual fund industry. The guys seem to think the ETF could be responsible for the impending death of the mutual fund. From a marketing perspective, some of the newer ETFs seem to be designed as “mutual fund killers” in the way they are so finely parsed in an attempt to capture the more arcane instruments of the mutual fund industry, Jeff says.
“The active mutual find will always be there,” Ross says. “The $9 trillion mutual fund industry is safe.”
Pete Najarian’s issue with ETFs has to do with their weightings. The weightings are often so skewed that he doesn’t think investors are getting everything they want out of a particular index. For example, RTH, the retail ETF is hugely weighted to Wal-Mart (WMT) and Home Depot (HD). Ross thinks this is a market-cap issue. Companies like Wal-Mart have huge market caps so it would make sense that an ETF it is included in would be skewed. Ross says State Street has launched a series of industry ETFs that are equally weighted, which he believes is the best way to approach industries.
As the ETF industry grows at about a 30% clip, Ross says the opportunites ahead will likely be in the fixed-income space and thematic space. There has been buzz about the possibility of exchange ETFs, but Ross thinks it’s unlikely as the exchanges continue to consolidate. That doesn’t mean investors won’t be able to get exposure to the exchanges in an ETF if they want it, he says. After all, ETFs are all about convenience.