Wednesday, February 6, 2013

20 Years of ETFs

The January 26th issue of the Economist goes through the 20 years of ETFs. The Spider, SPY, the first ETF was introduced 20 years ago. Today, there are 4,731 funds, and the industry controls $2 trillion, with no sign of slowing. Index tracking offers obvious economies of scale. Running a small fund or a large fund requires the same number of people if all we are doing is tracking an index. So the Spider today charges only 0.09% a year. Great for small investors if used for creating diversified portoflios. Some of the synthetic ETFs make no sense. Investing in Treasuries and going long or short futures (often in a leveraged way) arguably serves no purpose: 3x Treasuries, 2x short currencies, etc. The cost of rolling the futures combined with the basis risk destroy whatever purpose these synthetic ETFs are supposed to have. How about 4x the temperature in Boston (we have weather futures after all) and 6x one minus Libor (we have Eurodollar futures)? C'mon, somebody think those up. I can see the hedging purpose of the futures. Why anyone needs these in an investable form is beyond me.

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