There are now almost 1,400 exchange-traded products on the market with more than $1 trillion in assets under management. And new fund sponsors are entering the market all the time. So far this year, 285 new exchange-traded products have been launched while 15 have delisted, producing a net gain of 270 funds. That’s an almost 25 percent increase in the number of funds available so far this year alone. And based on SEC filings, there are as many as 1,000 exchange-traded products in the pipeline awaiting launch over the coming months and years.

Given all that competition, new products need to make a big splash to garner attention from investors and financial advisers.

Russell Investments, which has used its proprietary indexes to expand into the ETF arena, continued to build its lineup with the launch of three new ETFs last week. With its first foray into the international arena, Russell’s three funds apply factor-based strategies to developed markets outside of the US.

• Russell Developed ex-US High Momentum ETF (NYSE: XHMO) will track a basket of international stocks which are experiencing the highest medium-term price momentum, measuring each component’s cumulative return over the last 250 trading days.
• Russell Developed ex-US Low Volatility ETF (NYSE: XLVO) will track low volatility stocks as measured over the last 60 trading days.
• Russell Developed ex-US Low Beta ETF (NYSE: XLBT) will include stocks which have low betas compared to the Russell Developed ex-US Large Cap Index.

All three funds have expense ratios of 0.25 percent and each of their portfolios will be rebalanced monthly. Additionally, all three funds will cap each individual component at 3 percent of assets to maintain proper diversification.

Russell also announced that it has reduced the expense ratios on its five existing large-cap factor ETFs by 29 basis points to 0.20 percent. It also reduced the expense ratios on its five small-cap factor ETFs to 0.30 percent, a big decline of 39 basis points. The reduced fees will remain in place until 2014.

The move is calculated to make Russell’s products more competitive, bringing expenses down to the lower end of the ranges for large-cap and small-cap products. Given that factor-based investing via ETFs is a relatively new phenomenon, Russell’s lower fees should also help establish such strategies with price-conscious investors.

Invesco PowerShares Capital Management is using a similar pricing tactic with its four new funds, though it’s taken its approach to a greater extreme.

Leveraging its relationship with index provider KBW, the outfit launched a line of new financial funds last week, which include:

• PowerShares KBW Capital Markets Portfolio (NYSE: KBWC) tracks brokers, asset managers, exchanges and custody banks.
• PowerShares KBW Insurance Portfolio (NYSE: KBWI) tracks a basket of insurance companies.
• PowerShares KBW Bank Portfolio (NYSE: KBWB) tracks banks and thrifts.
• PowerShares KBW Regional Banking Portfolio (NYSE: KBWR) tracks regional banks.

Although the prospectuses for all four funds list expense ratios of 0.35 percent, PowerShares will waive those expenses through January 2012. While this move will attract the attention of new investors, it’s primarily aimed at luring investors away from similar products at other ETF sponsors.

KBW had previously licensed these indexes to other ETF sponsors, including State Street Global Advisors, which used KBW’s indexes as the basis for some of its financial sector funds. State Street now uses indexes created by Standard & Poors as the basis for its financial sector funds. So the fee waiver is a clear shot over State Street’s bow.

But whether or not these fee reduction tactics will work for either Russell or PowerShares is an open question.

While the move makes their products more enticing to those investors looking to put new money to work, that doesn’t necessarily mean they will lure existing investors away from other products since there are definite switching costs involved.

For instance, if investors have capital gains, the tax bite from switching ETFs would likely erase the benefit provided by lower expenses.

In addition, these new ETFs have yet to establish the trading volume necessary to make them liquid investments. Their daily trading volumes range from just 500 to 900 shares, so the wide bid/ask spreads that result from such low trading volumes make for expensive transactions.

So while temporary fee waivers and low expense ratios definitely provide investors with some benefits, there are always other variables to consider.

Portfolio Update

Please see this month’s issue of Global ETF Profits.