Know the Providers Before Shopping for an ETF
BlackRock's (BLK) iShares wears the crown as largest ETF provider in the U.S. with $360 billion in assets, followed by State Street (STT) and Vanguard, but new players have emerged like Charles Schwab (SCHW) and PIMCO. Others have announced plans to get in on the game, too, such as T. Rowe Price (TROW), Putnam, TD Ameritrade (AMTD) and Goldman Sachs (GS).There's an array of choices. Does it matter where you go, or are other criteria just as important when you decide to add ETFs to your investment mix?
"When we are looking at ETFs and the underlying index is offered through multiple providers, cost is a primary factor, with support and service a close second," says Randy Brown, chief wealth strategist of Briteline Wealth Management.
Many times, when he looks for an index or sector fund that may only be offered through one or two providers, then it's all about being the right fit, he adds.
All providers are not the same. There are differences in both offerings and cost. "If there are a number of ETFs representing a certain area, such as in Treasury bonds or small caps, investors should use the competition to their advantage and research the players," says Tom Lydon, president of Global Trends Investments.
Many providers are known for something and have expertise in a particular area (PIMCO with bonds, for example), and investors should educate themselves on that front too, so they can take advantage of the knowledge, says Lydon.
Lydon offers highlights of the top 10 providers. The biggest player, iShares, is known for a varied and large product lineup -- single country funds, asset class funds, bonds, and provides the largest emerging markets ETF: iShares MSCI Emerging Market (EEM).
State Street is big on sector funds that are plays on the S&P 500 sectors, as well as a varied fixed-income lineup ranging from plays on junk bonds to Treasuries. State Street is home to two of the most heavily traded ETFs in the world: SPDR S&P 500 (SPY) and SPDR Gold Trust (GLD).
For the budget minded, Vanguard has the lowest prices in the industry. Market share increased 4% last year, the most of any other provider. No other provider increased its market share by more than 1% in 2009, says Lydon. Vanguard Emerging Markets (VWO) is gaining ground in terms of assets on iShares' EEM, which tracks the same index, but is more expensive.
PowerShares offers diversity, plays on global sectors, commodities, alternative energy, and emerging markets. PowerShares was the first to launch actively managed ETFs and has five available, while the venerable PowerShares QQQ (QQQQ) is one of the world's largest ETFs.
ProShares' claim to fame is that it was the first to create leveraged and inverse ETFs, which offer plays on anything from asset classes, global regions and sectors.
Van Eck's novelty is niches, broad and single-country frontier and emerging market plays, and sector plays on nuclear, steel and solar power.
WisdomTree is all about dividend strategy, building funds by looking at companies that pay dividends and weighting accordingly. The funds cover emerging markets, sectors and asset classes. WisdomTree also offers currency ETFs, which don't hold actual currency but invest in either non-U.S. money market securities or a combination of money market instruments designed to give exposure to non-U.S. money market securities rates.
Direxion is known for triple-leveraged ETFs that offer plays on everything from emerging markets to specific sectors indexes and Treasuries. As the tenth largest provider, Rydex's specialty is leveraged and inverse ETFs.
Taking a good look at providers in terms of cost, service and specialty is just a first step in ETF investing. Products need to be carefully studied and completely understood before any investor should consider making an investment allocation to one of them, says Kevin Mahn, portfolio manager of the SmartGrowth Funds.
"Due diligence becomes of paramount importance," Mahn says. "It is true that all exchange-traded products are not created equal. Starting with the differences between exchange-traded funds and exchange-traded notes and ranging to the differences between the many available passive and active strategies in the marketplace today."
What does this mean for investors? Know what you're buying. When it comes to ETFs, ignorance is not bliss.