By ANNA PRIOR
Just when everyone> thought exchange-traded funds couldn't get any more popular having become a feature in many investors' portfolios the $1 trillion industry has hit the jackpot with some loyal followers. Introducing the all-ETF portfolio.
In a bold move of sorts, some ETF-selling firms are pitching a one-breed-fits-all product to advisers and investors alike and they are enjoying some success. Investors now hold more than $28 billion in all-ETF portfolios; that's nearly quadruple the amount invested in them just two years ago. At the same time, there are now 83 investment managers offering ETF-exclusive portfolios, up from 25 in early 2009. Demand is growing so fast that Charles Schwab is developing a system to build and track 401(k) plans filled only with exchange-traded funds, a move that analysts say could spur other big brokerages to follow suit. And fund researcher Morningstar is developing a database to track the 300 (and growing) all-ETF portfolios it knows exist. "We're trying to shed some light on it," says Timothy Strauts, an ETF analyst at Morningstar, noting that hundreds more such portfolios are probably in use.
Going to an all-ETF portfolio might sound radical, but experts say there is something potentially attractive about it. Most ETFs are tax-efficient, cheap and easy to trade. Analysts say that the more than 1,000 different ETFs being sold offer easy ways to pick up investment exposure in commodities, country-specific stocks and even bonds. There are drawbacks with the strategy, of course. Some ETFs don't track their indexes particularly well, or use a lot of borrowed money to try to goose returns, which increases the risk of big losses. Also, most ETFs don't have managers who can increase positions in more attractive parts of the market or sell out of less attractive areas.
And people might want to think twice about creating an all-ETF 401(k) plan, analysts say. The tax efficiency of ETFs gets negated in a 401(k) because investors don't pay taxes on any of their gains until they start taking distributions which is usually many years down the road. Meanwhile, most retirement plans, to keep trading costs down, make trades only at the end of a market day. ETFs can be traded all day, but commissions would add up fast and eat into returns.