Some of the growth of exchange traded funds is being fueled by investors shifting from traditional index funds to ETFs. The ability to buy and sell ETFs during the trading day is one reason why investors are making the switch, but some observers worry investors may overtrade ETFs and shoot themselves in the foot.

Terry Smith, founder and CEO of Fundsmith, contended that ETFs “are almost certainly being mis-sold” and investors who “think ETFs are simply index funds” have been misinformed, reports David Ricketts for Financial Times.

According to research firm Strategic Insights, global ETF products brought in $160 billion last year, compared to the $70.9 billion in inflows for traditional index funds, closing the gap between ETFs and broad index funds to about a $30 billion dollar difference in assets under management, according to the FT story. [Legg Mason, Fund Firms Mull ETF Entry]

Smith wondered why retail investors would use an ETF over a “broadly-based index fund” that can do a similar job, if not better. Vanguard founder and buy-and-hold proponent John Bogle has also been critical of ETFs, questioning whether the ability to trade is a good thing for investors.

ETF providers counter that there are a number of reasons why their products are better. David Bower, head of UK distribution at iShares, stated that the ability to trade through out the day “is very attractive,” especially if the markets make major moves up or down during the day.

“This applies to someone holding the product for a long or short period of time. Even retail investors want to know the price of an investment at the point they want to make that transaction,” Bower said in the article.

Andy Clark, head of wholesale for Emeas at HSBC Global Asset Management, also believes that ease of access is the primary reason behind retail investors’ choice in ETFs.

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