Too Many Me-Too ETFs

Wouldn’t it be better if we just had one or two DAX ETFs, Paul?

Your blog on “virtuous competition” among DAX ETFs sounds great: unleash the forces of capitalism, drive down prices for customers, etc.

You note that the average spread on six DAX-focused ETFs narrowed to about 4 basis points in November, which looks mighty good compared to 6 basis points for the underlying DAX basket.

But imagine what that spread would be if there were only two or three DAX ETFs, instead of six? We’d be looking at 1 or 2 basis points, not 4 or 5. There are plenty of US-listed ETFs that trade a penny wide against baskets priced at 10 cents or more; the iShares Emerging Markets ETF (NYSEArca: EEM) is one example.

The existence of so many identical products in Europe does not strike me as “virtuous competition.” To me, it speaks of a sales process where individual banks market “their” product to “their” internal clients. If there were true virtuous competition, with good information and frictionless trading, one or maybe two DAX trackers would rise to the top, consolidating all volume and driving spreads down further.

Obviously, problems with passporting funds play a key role in keeping multiple ETFs alive. And I’m glad we’re seeing tight spreads despite the replication.

But in the end, we should expect one or two ETFs tied to each individual index to dominate, and rightfully so. The fracturing of volume may be a sign of entrepreneurial verve in the ETF industry, and some direct competition is good to keep people on their toes. But until spreads get down to a penny, I’ll still be waiting for the true cream to rise to the top.

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