As exchange traded funds (ETFs) continue to penetrate the investment world and offer investors many benefits including easy portfolio diversification, it is important to be aware that not all ETFs are created alike.
Exotic ETFs can come in many forms: narrowly sliced segments of the market, leveraged and inverse funds or commodity funds that hold futures. (What’s the beef with leveraged ETFs?). Some of these investment tools – particularly leveraged and inverse ETFs – have gotten somewhat of a bad rap because many investors who didn’t know how to use them, used them and got burned. (Why they are misunderstood).
However, at the recent ETF Insights online conference, David Hoffman of InvesmentNews discussed how leveraged and inverse ETFs, like any other ETF, can be a great addition to a portfolio when you understand how they work. (Features of ETF Insights conference).
They key here, as with everything else, is using them in moderation and understanding how they work. (The ins and outs of leveraged ETFs). It is very important to understand that an underlying characteristic behind leveraged and inverse ETFs is that they rebalance on a daily basis to achieve the desired exposure that they are trying to seek. This means that one must watch these funds on a daily basis and they generally don’t make sense for buy-and-hold investors. (Why buy-and-hold is dead).
As for other types of ETFs, it’s important to be alert to the fact that as the industry grows, ETFs will appear in increasingly different forms and it’s going to be up to investors to do their research before they buy.
For more on leveraged ETFs, visit our leveraged ETF 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.