Vanguard index pioneer, Jack Bogle, called exchange traded funds (ETFs) "mutant" index funds in a recent Wall Street Journal article. Bogle does believe ETFs have an outstanding benefit: diversification. However, the fact that only 12 of the 400 plus ETFs track broad market segments, such as the S&P, makes him weary.

Lately, the trend has been towards tracking narrower market segments which, he believes, does nothing to help divert performance chasing. The idea that the fastest growing sectors for ETFs are those that thrive during the latest bull market, doesn’t support the foundation for ETFs. Joe Morris of Ignites  further reports that although ETFs have been a blessing to financial intermediaries, Bogle doesn’t think there is proof they’re paying off for investors.

Excuse me Mr. Bogle, it’s time to give up your typewriter.

ETFs, like any other investment tool, if used with a proper strategy can be successful in portfolios.  Using a 200-day moving average or a stop-loss can create a discipline to exit the market if it goes south.  ETFs offer the opportunity to take advantage of market segments or regions that are trending in the right direction, but the exit strategy is important.

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.