ETF Trends
ETF Trends

The North American Securities Administrators Association (NASAA) recently issued a warning about the potential dangers of using exchange traded funds. The warning is empty, vague and at best states information that any investor can find within their product prospectus, a mutual fund columnist argues.

NASAA cautions investors “may not understand how these complex investment products work or the potential risks they may face.” David Massey, the North Carolina deputy securities administrator and current NASAA president, noted: “As with any investment, investors should know what they are investing in.”

Chuck Jaffe on MarketWatch argues that if securities regulators are going to warn the public against “complex investment products” and tell them to do their homework, they should also include mutual funds, bonds and the rest of the investment product spectrum. [Are Complex ETFs For You?]

“It was less like an investor advisory and more like they were doing Mad Libs, and every time they needed to insert a form of investment they said ‘ETFs,’” said Paul Justice, director of ETF research at Morningstar, in the column. “This is an advisory that seems to do nothing except maybe steer some people away from what, for them, might be an intelligent investment choice.”

The goal of regulators is to protect the public from potentially dangerous investment tools. But the recent warning may have confused many investors that use ETFs and find them to be a valuable tool within their portfolio. [ETF Usage Will Double by 2012.]

Jaffe proposes that there could be a need for a smaller disclosure statement available for investors when they are buying leveraged or inverse ETFs. Regardless, the investment world is dictated by “caveat emptor,” where an investor is assumed intelligent enough to read and understand the prospectus.

In other words, investors should always understand what they’re buying, whether it’s a stock, bond, mutual fund or ETF. If one needs a reminder, then there may be bigger issues to consider.

Tisha Guerrero contributed to this article.

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.