ETFs and the Alphabet Soup Topped with Independent Research


New York – A few weeks ago, an article in The Economist titled Too Much of a Good Thing expressed concern about exchange-traded funds or ETFs. Independent research on ETFs might be the answer.

“… [T]he headlong expansion of exchange-traded funds (ETFs), which by May this year controlled almost $1.5 trillion of assets (not far short of the $2 trillion in hedge funds), has become a matter for concern among regulators. Could ETFs be the next source of financial scandal, or even of systemic risk?” asked The Economist.

The concerns among regulators highlighted by The Economist include risks related to liquidity, leveraged ETFs, and the complexity of Exchange-traded products (ETPs). The newspaper fears that the “alphabet soup” (as it calls the various ETF types as they are usually referred to by their initials) might end up spilling out just like the financial innovation that led to the subprime housing crisis.

Our response to The Economist’s concerns is: INDIES. Independent research might be the answer (as it could have been during the time leading to the subprime crisis) to uncover and avoid risks related to ETFs. Integrity’s radar covers over 40 providers of research on ETF, and as these instruments become more popular we expect to see expansion in this space.

Our observations show that third party research providers covering ETFs can be divided in three main categories:

1. Frequent coverage of individual ETFs
2. Technical analysis for ETF trading strategies
3. ETF portfolio / asset allocation

Large research companies such as Morningstar, S&P’s and Lipper offer a broad set of ETF research capabilities. In addition to daily data for the ETF universe, these firms offer individual analyst reports for hundreds of ETFs. For those that prefer alternatives to the large rating agencies, a number of independent firms offer quality research products on ETFs.

AltaVista Research, for example, offers a fundamental approach to ETF analysis (in addition to a backward-looking and performance-oriented analysis). New Constructs offers a patented research platform that revises accounting distortions and discounted cash flow analysis, leveraging data from financial footnotes. XTF offers structural analysis including rankings of the entire US-listed ETF universe. Some analysts have made a name for themselves within the ETF space. Deborah Fuhr, formerly at BlackRock, has been referred to as the “guru” of ETF research thanks to her insightful reports and comments. The news this week report she has departed BlackRock although no further details have been released. Integrity will continue to track her steps as well as those of the research providers in the ETF space.

Quick note about ETFs: ETFs combine key elements of traditional mutual funds and individual stocks. They represent diversified portfolios that track specific indexes, just like mutual funds, but they can be bought and sold in a day, just like stocks. ETFs offer trading flexibility, portfolio diversification, tax efficiency, transparency of cost and holdings, and lower costs if it is an ETF that tracks published market indexes. There are many Types of ETFs such as foreign currency, commodity, derivatives, etc.


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