On that vein, consensus from players in the ETF industry that there is going to be a degree of consolidation in the European market over the next few years should be welcomed.
While a continuous stream of new entrants into the market has been attributed with bringing costs even lower, the patchy or ill-thought out offerings from some providers are not in the interests of investors.
The sheer pace the ETF market has mushroomed since the early days of State Street Global Advisors’ SPDR ETFs, listed on the American Stock Exchange in 1993, is behind many of the issues pervading the sector at the moment.
Certainly, it cannot be said the mutual fund industry is not facing problems of its own, as some commentators such as Fundsmith’s Terry Smith would have us believe.
But the feeling regulators have that the development of ETFs has got ahead of them is chiefly down to their rapid growth.
I like to think of it as the Britney Spears effect: too popular, too young, too soon – a victim of their own success.
Less is more
It’s never fashionable to encourage less competition when it comes to investment products, but the impact of fewer and better-established players dominating the market would hopefully give it some cohesion.
As Jose Garcia Zarate, ETF analyst at Morningstar, said at a recent ETF panel discussion hosted by SPDR: "There have been a lot of negative comments made by the industry itself. Rather than working together to publicise the benefits of ETFs, it’s all ‘I’m better than you because I’m physical’."
Some of the big guns have already tried to rise above the bickering, with BlackRock (parent company of iShares) issuing a "call for greater transparency and consistent regulation" back in October.
Other ETF providers such as Source were also part of the consultation that led to BlackRock’s blueprint, and this shows some cooperation occurring at a higher level.
If the discussions do not become more fruitful, however, and encourage a move from the industry to clean up its act, regulators are increasingly likely to get involved.
Zarate predicts 2012 will be the year of regulator’s upping the ante on ETFs and advises providers to act ahead of this to show genuine signs of change.
Steve Doran, a fund manager at HSBC Global Asset Management who uses ETFs, agrees: "If providers do not start to make their products and how they work clearer, the regulators will act."
So it could be regulation that forces some more marginal providers out of the market, or as Portfolio Adviser reported earlier today, it could be cost.
Either way, if it gets rid of some of the more "toxic" elements of the industry, bring it on.
