More than a quarter of the exchange-traded-funds on the market are hitting shareholders with high trading costs that escape many investors' notice, making moot the low costs that are one of the industry’s biggest selling points.
"Individual investors losing out: That's the risk with this zombie underclass" of ETFs, Matt Hougan, director of ETF analysis for IndexUniverse.com, told The Wall Street Journal.
"People will have bad experiences."
It’s still early days for many of these ETFs, which may trade more smoothly if they attract more assets.
But even many established funds remain small, and some that have attracted substantial assets still carry significant trading costs.
Moreover, trading costs can be high in ETFs that may appeal most to small investors, such as the target date funds aimed at retirement savers that move to a more conservative investment mix as they approach investors' retirement date.
ETFs, with total assets of $640 billion, increased their assets by 20 percent this year.
However, the 10 largest funds account for roughly 40 percent of total ETF assets and just 10 account for nearly two-thirds of average daily ETF trading volume.
Bid-ask spreads on Vanguard ETFs have narrowed significantly in recent months and are now identical to those on iShares, The Wall Street Journal reports.
Analysts say Vanguard Group, the third-largest ETF manager, is gaining market share partly due to its low fees.
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