Exchange traded funds (ETFs) and index funds are changing right before us, and the new generation of funds have evolved into a different investment vehicle. Before, the idea was a hands-off approach, while the index funds mirrored the performance of broad market benchmarks. This made the funds slightly predictable and the outcome was usually positive out-performance over an active stock-picking approach.
The new funds have sliced the market up in a bevy of different ways in an effort to differentiate their offerings, however, one result is higher fees. In addition, some firms are inventing new indexes to track, reports Eleanor Laise of The Wall Street Journal For example, WisdomTree Investments Inc. offers dozens of ETFs that track indexes composed of dividend-paying stocks. Many of these funds are less than a year old so there is no solid track record.
The biggest factor to consider amongst all of these investment choices would be risk; the risk of under-performance. On the other hand, the creativity the providers have put into the construction of these ETFs may pay off with measurable alpha.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.