NETFA: Organized Crime Comes To ETFs (SPY, UNG, USO, INDEXSP:.INX)
Andrew Snyder: The ETF sector has grown at an enormous pace. But until now, the industry had no central voice. Now that it does, it is not good news for investors.
The most troubling arm of the investing world is about to get much stronger… and much more dangerous.
The ordinary investor may hear of the creation of the National Exchange Traded Fund Association (NETFA) and not give it a second thought.
So what, right? Everybody owns ETFs. They have grown to be a vital part of most portfolios.
But that’s the problem.
The industry has become dangerously large… and now dangerously powerful.
Let me tell you why the creation of the NETFA stands to separate you from your money. You see, there has been a war brewing in the ETF sector for the past 16 months. As investors flee traditional mutual funds, ETF operators are battling for your money.
It makes sense. Over the past two decades, the ETF market has blossomed from a mere seed of an idea to an industry that controls over $1.2 trillion in assets. The amount of cash flowing into the sector is growing by about 24% annually.
Originally, that money was concentrated to a handful of large operators. But the recent surge in ETF demand has opened the door to competition. Right now, investors have their choice of over two-dozen ETF providers… and there are more itching to get into the game.
That’s why the industry’s big dogs are eager to get the NETFA off the ground. They want to use this trade group to slow the competition and end the brewing price war.
As competition has grown, the fees ETF providers slip out of their investors’ portfolios have shrunk dramatically.
Recently, Vanguard slashed its fees by 15% to 20%. The move was quickly followed by State Street. It cut the price of nine of its SPDR funds by 10%.
One of the problems is big advisory firms like Charles Schwab and Scottrade’s FocusShares are using their ETFs as a sort of loss leader. Their ETFs have ultra-low fees but — proving no lunch is free — they make up the difference through the fees earned in their advisory network.
These moves have all the makings of a good old-fashioned price war.
That’s where the NETFA comes in.
Its inaugural chairman is none other than John Hyland — the boss behind the controversial United States Oil Fund (NYSEARCA:USO) and United States Natural Gas Fund (NYSEARCA:UNG).
His mandate is clear… ensure the industry moves in a cohesive direction so it can milk every last penny out of unsuspecting investors.
Remember, back in 2009 it was Hyland’s oil fund that drew the ire of the feds. Regulators accused the fund of inciting the volatility and uncertainty that pushed crude prices to record highs in 2008.
And now… he’s the face of the industry.
I won’t dull my words. ETFs are dangerous. They may have value in a trading strategy (my colleagues make use of them all the time). But they have no place in a long-term portfolio.
And as the ETF industry grows, so will the danger.
That’s because at the same time these Wall Street hooligans are slashing their fees to win the war for your hard-earned money, they are cutting corners by entering flimsy derivative trades that pit trusting investors against dangerous levels of counterparty risk.
It is no coincidence the NETFA pops up at the very same time regulators across the globe are digging into the controversial practices ETFs have become oh-so-fond of using.
For example, the industry got a slap on the wrist from the SEC and FINRA after steering investors into dangerous derivative-based ETFs. And now those same leveraged funds are the source of multiple class-action lawsuits. The NETFA is designed to help ward off suits like these.
And then, there is securities lending.
It has grown to be the industry’s latest hot-button issue. Lending shares to short sellers has become a big revenue generator for fund operators (which helps them offset those freshly lowered annual fees), but it creates all sorts of hard-to-monitor counterparty risk that ordinary investors have no idea exists.
The NETFA will use its deep pockets to help create a divisionary smoke screen in Washington to ensure regulators don’t act on the truth.
The bottom line is simple. The ETF industry is becoming very powerful and very lucrative. And now, the NETFA will be on the front lines of defending and promoting the industry’s efforts in Washington.
For the average investor, nothing good will come out of its creation.
Related: S&P 500 Index (INDEXSP:.INX), SPDR S&P 500 ETF (NYSEARCA:SPY).
Andrew Snyder is the Editorial Director of Taipan Publishing Group and the Managing Editor of Taipan Insider. Andy’s first year in the world of finance and investing involved learning the intricate details of the financial industry, as an advisor. He specialized in handling the vast portfolios of very wealthy clients, where he excelled at making them even wealthier. Since then Andy has received his MBA, published an award-winning book and been published in numerous publications. He has also appeared on Fox News and other media outlets.
With his background in research combined with his hedge fund-style education and knowledge of the market, Andy is acclaimed for his no-nonsense style of writing and his sharp, deep-thinking analysis. His goal is to use his knack for Wall Street research and analysis to lead his readers to little-known profit opportunities. Andy’s readers have described him as unshakeable, suspiciously knowledgeable and just a bit nutty; these qualities have led him to uncover market-moving events and turn them into reliable, double- and triple-digit gains.