From their humble beginnings, exchange traded funds were originally engineered as a simple passive investment tools that tracked an underlying benchmark index. As the industry expanded and ETFs proliferated, fund products are becoming more complex and investors should understand the evolving nature of the investments.
The ETF investment started out simple enough but it has grown more complex, offering enhanced returns, such as through leveraged products, and managing volatility, reports Paul Sullivan for the New York Times.
As with all investments, these new products require added education so that investors know what they are getting themselves into.
“You’ve got to know what you’re buying,” Greg Peterson, director of research at Ballentine Partners, said in the article. “The ETF will do what it says it will do. But people don’t know what to expect.”
Additionally, investors should know that more complex ETF options may charge higher fees, especially those that cover niche areas of the markets where it will be costlier to acquire securities or those that fall under actively managed strategies, compared to traditional beta-indexed products.
“If you hold it for five years, that cheaper ETF may make more sense,” Jim Ross, a senior managing director at State Street Global Advisors, said in the article. “But it’s like going into the drugstore: the generics are always cheaper, but they may not be better.”