Exchange traded funds (ETFs), like anything else, have their detractors. But are the criticisms lobbed at them by those who aren’t board with the investment products entirely fair?
ETFs have become phenomenally popular in a relatively short span of time. Since 1993, they’ve gone on to gain $751 billion in assets and more than 800 offerings, as of November 2009. ETFs are tax-efficient, transparent, relatively low-cost and offer easy diversification to both individual investors and institutions. So, what’s the problem?
Some advisors and analysts feel that the excitement over ETFs and Wall Street’s greed could ultimately result in disappointment for the investors who own them, says Sheryl-Nance Nash for Daily Finance.
Among the criticisms:
- Segments of Wall Street have seized on the opportunity to commercialize ETF and are in danger of overdoing it. They contend that ETFs are just another investment vehicle, not a substitute for investment management. [A flood of ETF launches.]
- Robert Isbitts, chief investment officer for Emerald Asset Advisors, outlines this scenario: A good product idea gets popular with financial advisors, and the product gets mass-produced, with each company trying to one-up its rivals. Increasingly innovative but more complex varieties hit the market. The media start poking holes. Producers and consumers get confused about the pitfalls and risks. Money is lost. [Read about exotic ETFs and how to use them to your benefit.]
- Wall Street incites confusion by encouraging investors to trade ETFs actively by creating hundreds of thinly sliced funds representing every imaginable sector, industry, and trend. The proliferation of ETFs may be harmful to building solid, long-term portfolios.Our rebuttal: Just because I can eat 10 plates of food at an all-you-can-eat buffet, it doesn’t mean I will. The same goes for investing: the majority of investors approach it in a level-headed way. The ones who don’t will only get burned.
Our rebuttal: We agree – ETFs should not be used as a substitute for investment management. But it’s hardly fair to lay this at the feet of the ETF industry, because there are plenty of investors who use other types of securities who may not be managing their investments as much as they could be.
Our rebuttal: There are confusing aspects about ETFs, sure, but for the most part, they are extremely simple to use. For the more complex products out there, providers, bloggers and the traditional news media have done an excellent job of educating investors. It all comes down to this: don’t buy what you don’t understand, and do your due diligence.
The fact is, ETFs are superior tools to use. They tend to have less risk than single-stock picking, and they’re more transparent, tax-efficient and cheaper than most mutual funds. ETFs have given the individual investor more power and control than ever before. How can you argue with that? [How to do your own research about certain ETFs.]
Check out the The ETF Trend Following Playbook to get a head start on your investment discipline.
For more stories about ETFs, visit our ETF 101 category.
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.