ETF Inflation and Brown's Law of Wall Street Product Creation

Brown’s Law of Wall Street Product Creation:

“Wall Street products decline in quality, popularity and necessity with each iteration after the original.”

They say the weak dollar is going to cause bubbles and inflation in various asset classes and sectors of the economy.  I found one such bubble for certain.

The ETF industry has gone into absolute overdrive this year in terms of new fund launches.  As 2009 wore on, the fund factories only showed signs of acceleration.  I don’t know what kind of crackheads are throwing money at these things, but the sheer volume of new exchange traded funds popping up means that someone is buying them.

So, there were 116 new ETFs launched in 2009.  That’s 116 more than anyone really needs.  There are now over 900 ETFs trading and they are getting more pointless and ill-conceived with each new offering.

As you can imagine, quite a few of this year’s batch were launched in order to capture either the bond bubble or the commodities craze.

Let’s use this year’s abusive onslaught from the ETF industry to remind ourselves of the basic rule of Wall Street product creation, which we will henceforth refer to as Brown’s Law of Wall Street Product Creation (it’s my site, too bad).

Anyway, Brown’s Law of Wall Street Product Creation goes like this:

“Wall Street products decline in quality, popularity and necessity with each iteration after the original.”

It can be expressed thusly:

Wall Street Product X is > similar Product Y offered recently after, which is > Product Z, released after that.

Trust me, the 17th fund launched to provide exposure to fabric dying companies in Western Nepal with market caps over $500 million is not going to be an improvement on the original Western Nepalese fabric dying company fund.

We’ve seen this phenomenon take place over and over again, from sock puppet-represented internet IPOs to clean energy mutual funds.  The quality and caliber of these offerings degrade steadily, not unlike the quality of a photocopy that is a copy of another photocopy.

Basically, the first product of its kind on Wall Street, whether good or bad, will usually be the best of the bunch and superior to the imitation products that come after.  Follow-up products, sequels, me-toos, and enhanced versions of already-trading vehicles are usually created as a way to capitalize on a trend or a prior money-raising success.  Like movie sequels that are made with the express intention of easy profits for the studio, they ought to be avoided in most cases.

Heeding Brown’s Law of Wall Street Product Creation will prevent you from jumping onto a train just as it’s about to run out of steam and drop off the rails into a gulch.

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