Should exchange traded funds (ETFs) be avoided? While we know the benefits of ETFs, sometimes people need a little convincing about their merits when it comes to these funds vs. active management.
According to Wayne Pinsent for Investopedia, index investing is not the way to reach personal investing goals. He makes the case that buying an index and letting it ride is all well and good, but that stocks aren’t always rational. We’ll list his points first, then counter with our own:
1. Pinsent Says: Downside protection. ETFs will go up when the markets are up, but an investor may be caught in the downward spiral when the markets are down.
ETF Trends Says: If you have an exit strategy and use it faithfully, you won’t be vulnerable on the downside. There are also long/shorts that allow you to hedge your current positions, if you’d like to.
2. Pinsent Says: Reactive ability. At times, one company may do well and pull everyone one up, which could create a sector that is overvalued, and vice versa. Investors can gauge companies individually if they are undervalued or overvalued.
ETF Trends Says: ETFs offer so many different strategies to help investors minimize this risk. There’s value-weighting, but there’s also equal weight, revenue weight and more. And again, if one company sinks the whole ship, bring out the exit strategy. Also, there’s not a limited number of indexes out there. Another upside to ETFs is that they help spread around the risk a little.
3. Pinsent Says: Holdings. Indexes have set portfolios. An investor can not pick the individual holdings within an ETF.