Thursday, August 11, 2016

ETF Proliferation May Be Leading To Wider Bid-Ask Spreads

From Barron's Focus on Funds:

The More the Scarier? ETF Proliferation Bad For Trading Health, Study Finds
Expense ratios – what investors explicitly pay fund managers to oversee their stocks and bonds – have generally fallen across the board in the realm of exchange-traded funds.

And investors have by and large flocked-to ETFs with the lowest expense ratios, with increased competition among big asset managers resulting in tit-for-tat fee cuts on many large ETFs. Morningstar research finds that investors are paying less for fund management mostly because they’re voting with their dollars.

However, investors should consider other costs of holding ETFs, too. Tax efficiency and trading costs influence the total cost of ETF ownership, too, though both of these are difficult for most investors to measure at the time of purchase.

An interesting recent study by academics at the University of Mississippi and the University of Alabama at Birmingham contends that me-too ETF proliferation in niche categories might actually increase trading costs for investors, since new ETFs tend to siphon volumes and market-marker attention away from existing ones. The result of more ETFs, their research suggests, is wider bid-ask spreads for entire fund categories that grow in number. Read “ETF Competition and Market Quality” by following this link. Here’s the key point:
“When multiple ETFs track a similar benchmark, they derive their value from a nearly identical pool of underlying assts. Investors will benefit when multiple firms provide exposure to a specific index or asset class if each fund lowers management fees to attract market share.