Although advertisements and news stories about the latest product developments in exchange-traded funds are rife, there is no data available that allows investors to track the funds, according to mutual fund analysts and executives. That is because fund data and rating services are struggling to determine an accurate method of tracking the funds, they said.
Part of the challenge is that exchange-traded funds are continuing to change rapidly, said Edward Rosenbaum, director of research for Lipper of Summit, N.J. Currently, Lipper tracks and classifies only WEBs - that track international exchanges - but the firm is working on how to follow other types of exchange-traded funds, he said.
Classifying exchange-traded funds is difficult because each one tracks a different index or specific sector within an index, making each one unique, he said.
"You have to make sure they're classified appropriately," he said. "We have to come up with a system that is intellectually honest to consumers. It's of little use to compare Nasdaq and S&P funds ... You can't consider them as a separate class because you have foxes and zebras in there. As it turns out there aren't comparable funds."
Another challenge is in developing a classification that is flexible enough to accommodate the products' evolution and growth, he said.
Despite these problems, Lipper must quickly decide how it is going to classify and track exchange-traded funds, he said.
"Market response [to exchange-traded funds] has been positive," he said. "There's probably not much to be gained by waiting to do whatever we're going to do or until there is no longer any news [on exchange-traded funds]."
Morningstar of Chicago is also closely tracking exchange-traded funds but has not decided how it will present the information to consumers on its website, said Russ Kinnel, director of fund analysis for the firm.
"We definitely want to add them to our database for portfolio-building tools," he said. "I don't know if we'll have the star ratings or not but [exchange-traded funds] are certainly growing and we want to have the data in our system and that's where our focus is right now. As they mature and we see how investors use them, we can adjust."
Morningstar's star rating system might not be as useful as it is with actively-managed funds because exchange-traded funds are not actively managed and they track the movement of an index, Kinnel said. But he did not rule out instituting a rating system.
"My initial blush is that a basic star rating wouldn't be helpful ..." he said. "But the pace [of development] is so rapid, I don't want to say no. There's potential for tools that we could create to help people evaluate them."
The amount of attention Morningstar dedicates to exchange-traded funds will largely depend on the amount of investor interest the product generates, said Brad Zigler, a principal at Barclay's Global Investors of San Francisco. Zigler is in charge of investor education for the firm's exchange-traded funds.
"Morningstar doesn't create a regular report on a mutual fund until it has three years of tracking record," he said. "I wouldn't expect to see a one page report for some time to come."
The question Morningstar and other fund tracking organizations need to answer is whether they track exchange-traded funds based on the indices they follow or if they break out a separate exchange-traded fund category, Zigler said.
"It was easier when there were fewer [exchange-traded funds] to lump them in the index categories," he said. "You can still do that but the numbers are growing such that maybe they are a category in their own right."
The Investment Company Institute of Washington, D.C. has discussed how it might track exchange-traded funds but has no immediate plans to do so, said John Collins, an ICI spokesperson.
"I think people are wondering how you'd handle the reporting to avoid double counting for exchange-traded classes plus the assets [held in other share classes]," he said.
Although they are currently receiving a lot of attention, exchange-traded funds account for few assets in comparison to mutual funds, Collins said. Paul F. Roye, director of the SEC's Division of Investment Management recently said there is about $40 billion invested in exchange-traded funds.
