A high (or low) hurdle

abnormalreturns
July 31st, 2007

No one at this point doubts the success of the ETF industry. The growth in the number of funds and amount of assets under management has shown it to be a vital part of the investment landscape of the new millennium.

We have had our quibbles with the ETF sponsors in large part due to what we see as a “throw it on the wall and see if it sticks” attitude toward the launch of new funds. Occasionally a new fund comes along that is a genuine innovation. Oftentimes fund launches are me-too funds that are simply there to fill up “shelf space.”

However once you take a step back and examine the ETF landscape you see that the easy access to a globally diversified, low cost, indexed portfolio has opened up to a wide range of investors, institutional and individual alike.

A recent post by Matthew Hougan at IndexUniverse.com demonstrates just how far this trend has progressed. In it he shows how one can create an all-ETF portfolio that is globally diversified portfolio representing a number of asset classes all with an expense ratio of 0.15%.

While one can quibble with the exact allocations, the overall picture is pretty amazing. A few years ago some of these asset classes, like commodities, were really not available to individual investors. Now they represent a mainstream investment vehicle.

The trend toward opening up asset classes via ETF is by no means over, but by definition it must be running out of steam. Again at IndexUniverse.com, Matthew Hougan reports on the imminent launch of a series of international small cap equity ETFs. While these are not the first of this type of fund they will be additional diversification opportunities.

In the end, what does all of this mean? Let’s go back to our title post. The returns from a globally diversified all-ETF portfolio with an expense ratio of 0.15% represents a high hurdle for investors of all stripes to overcome. Said another way, this minuscule expense ratio is going to be difficult to match for the average investor.

Whether one relies on actively managed mutual funds, managed accounts or your own stock-picking prowess all of these strategies require additional expenses in time and capital. Therefore today’s self-directed investor needs to be all the more clear that their approach can reward them over and above that available in a low-cost, indexed ETF world.