The popularity of exchange traded funds (ETFs) has brought about much debate over their advantages, particularly over traditional mutual funds. Many market insiders and renowned investors, such as Warren Buffett, are still divided over the possibility that ETFs may one day supplant the old-fashioned mutual fund.
To be clear, there are not any innate problems with ETFs, and their creation was in direct response to an unmet market demand. Much of the debate about problems with ETFs actually stem from concerns about how investors might be using them. Motley Fool points out that just because these funds can be traded at every minute of the trading day, doesn’t mean you should actually be doing it that often.
That’s Warren Buffett’s concern. Berkshire Hathaway’s (BRK-A) chairman suggests that traditional index mutual funds are more appropriate for most investors because there’s less pressure to engage in frequent trading. He’s not alone in his thoughts. Vanguard’s index pioneer Jack Bogle once called ETFs “mutant” indexes that only encourage performance chasing and shoot themselves in the foot.
Hey, guys. Give investors a little credit.
I admire both Buffett and Bogle for their contributions to investing over many years. But these guys should embrace innovation. The principles that Bogle and Buffett stand for (value, choice, service) are all wrapped into ETFs. I find their criticism of ETFs a little self-serving. Maybe those who have been able to maximize the benefits may no longer need their sage advice.
There’s no doubt there are investors out there who are using securities (whether it’s ETFs, stocks or futures) in a way that can hurt them. But you also need to give investors a little credit – the vast majority of them are educated and responsible. ETFs are just another tool for investors to use; it’s up to them to get the necessary education. These days, that’s easier than ever. And if they don’t take care to do research and understand where they’re investing, it’s a lesson they’re going to have to learn on their own.
ETFs work seamlessly with a trend following discipline that has you entering and exiting the markets based on technical signals instead of gut feelings. By doing that, you should be able to cut down on frequent, willy nilly trading that racks up big fees. Investors need not assume that all ETFs are automatically low-cost, and research should be done concerning cost, tax issues and liquidity.
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