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Does the world need another S&P 500 ETF?

09

September, 2010

Today, Vanguard will launch a new S&P 500 ETF under the ticker VOO.  This is will be the third ETF to track the S&P 500 (the other two are SPY and IVV).  Vanguard is touting this ETF as a lower cost alternative to the others (they have only a 6 bp annual fee compared to 9bp for the others).

  “Three basis points is a big deal in this segment,” Vanguard’s Rick Genoni, head of ETF development, told IndexUniverse.com. “We already have clients looking to switch to this product; we’ve had interest in this product for some time, but for legal reasons we could only finalize it now. “ http://www.indexuniverse.com/hot-topics/8050-vanguard-launches-sap-500-etf-takes-on-spy.html

We agree that competition is a good thing and usually drives down costs. But the question is:  In a market where latency is measured in microseconds, correlations are close to 1 and  quote stuffing is rampant, do we really need another S&P 500 ETF?  We know that there is an active market in arbitraging the underlying basket of stocks versus its ETF.  But could we know be setting up an oppportunity where those with the fastest computers can arbitrage an ETF versus a similar competing ETF?  What kind of volume will this produce?   Is this “real” volume or does it create an illusion of volume?   What do you think?

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