Exchange Traded Fund providers worry about 'clutter' in sector

HOLLYWOOD, Florida Tue Jan 28, 2014 3:36pm EST

HOLLYWOOD, Florida Jan 28 (Reuters) - At a time when the number of exchange-traded funds has skyrocketed to more than 1,500, major fund providers say they see a need to rein in product proliferation and focus on developing ETFs that are more targeted to specific investor needs.

ETFs, first launched in 1993, now account for roughly $1.7 trillion assets in the United States alone, and are expected to double over the next few years as more investors move toward the low-cost funds as a way to gain exposure to a variety of asset classes. But the hype around ETFs has also led to an explosion of new product launches, with some 150 new ETFs that came to market last year.

"While the era of expansion has created much to be proud of, it's also created a lot of clutter," said Martha King, managing director of Vanguard's Financial Advisor Services division, speaking at ETF.com's annual industry conference in Hollywood, Florida on Tuesday.

In 2009, the number of ETFs stood at just under 800, according to data from the Investment Company Institute. This means the number of available products has roughly doubled in just five years.

"While new ETFs continue to launch...we do think the frenzy has peaked," King said.

ETFs are largely passive investment funds that track a basket of securities such as bonds, commodities, or stocks and seek to deliver the performance of their underlying index. While product diversity is good, issuers say, the number of ETFs coming to market can overwhelm investors who need to understand how to incorporate them into their portfolios.

"We need to make sure the pace of innovation does not outpace the pace of education," said Kevin Quigg, global head of ETF strategy and consulting at State Street Global Advisors , the second-largest U.S. provider of ETFs, speaking at the conference.

ETF providers say they are turning their attention toward targeting areas of the market where they see specific client demand or need, for example, by creating funds designed to mitigate against expected volatility or protect investors in a rising rate environment, and closing funds where they see less client demand.

"The marketplace will decide what is the wheat and the chaff through asset growth," Quigg said.

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