Exchange traded funds (ETFs) have shown they can track the indexes they follow, but is the trend in niche products taking away from investors’ returns? ETFs are designed to follow benchmarks but they don’t always deliver the exact returns. John Spence of The Wall Street Journal points out that expenses eat into an investors bottom line as do taxes and the funds trading costs. Don’t forget to factor in additional broker commissions that you pay to buy and sell ETF shares. Therefore, it is important for an ETF to track a benchmark so investors can monitor tracking error. The current trend makes this more difficult as more exotic ETFs try to beat their benchmarks, rather than track them. On the other hand, the changes some ETF providers are making may enhance the overall performance. Time will tell.
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.