Exchange traded funds (ETFs) have been the subject of increasing criticism lately. What’s going on, and are the criticisms founded? Leveraged products, says John Spence for MarketWatch, have been the biggest target. Leveraged and inverse ETFs allow investors to maximize the market’s movements by one, two or three times.
Leveraged ETFs amplify the markets, while inverse funds allow investors the opportunity to profit as certain areas of the market fall.
But where the misunderstanding comes in is when investors use them for a purpose for which they were not intended – that is, buying and holding them. They’re designed to track the daily movements of the markets, but over time, internal compounding leads to tracking error. The providers of such ETFs have been open about the risks and truly want to educate investors as much as possible.
FINRA, however, recently put out an advisory reminding firms of their obligations. Among other things, the regulator of securities firms called for sales material to be fair and accurate.
Another criticism of ETFs is that they’re leading to overly frequent trading on the part of individual investors. Vanguard Founder John Bogle most recently spoke out on the issue.
According to Bogle’s analysis, 68 of the 79 ETFs that were covered had investor returns that were short of the returns earned by the funds themselves. Additionally, investors seemed to do the worst in high-profile and volatile sectors such as emerging markets, financials and REITs, states Matt Hougan for Index Universe.
We’re certainly all for better investor education, but to fight ETFs is a losing battle. ETFs have made it easier for all types of market participants to grab their desired exposure to the market, they’re cheaper than mutual funds, they provide investors with hundreds of choices and they’ve made it easier for them to do the necessary research, thanks to transparency. Investors are simply better served in a way they haven’t been now that ETFs are in existence.
What can you do to be a more educated investor? Research the funds in which you want to invest. It’s easier than ever. The providers’ websites have all the information you could possibly need, and we have an extensive education section on ETFs, as well.