By Grant Engelbart, CLS Investments

Over the July 4 holiday, I had the privilege of stepping away from the office for a while, and I found myself watching a lot of financial television, probably too much. Financial media has many positives and negatives – a discussion for another time – but, what has become apparent lately is that these “newfangled ETFs” are being covered in very different ways across networks and media outlets — if they are covered at all. Some observations are warranted to keep investors informed.

First, is the apparent negativity towards ETFs? Typical ETF-focused headlines (and, let’s be honest, a lot of headlines in general) only focus on the potentially negative aspects. Whether passive instruments are owning the whole market, causing flash crashes, or contributing to market volatility, there are generally several unfounded arguments against ETFs that make a lot of the headlines.

Second, is the firm attachment to old, established products? Mostly, there’s nothing wrong with that, but it doesn’t paint the rapidly growing ETF market in the best light. For instance, I heard the financial sector referenced several times as “The XLF.” To start, using “The” in the title makes it seem like there’s only one way to play financials via ETFs, and it’s through XLF. But there are more than 30 financial ETFs! In addition, this particular reference I watched was a way to play bank earnings. There are many banks in XLF, but there are a lot more in the $3 billion SPDR S&P Bank (KBE) ETF! This trend continues through many other areas. ETFs that represent biotech, retail, and other subsectors are typically referenced in confusing ways. I’ve heard both a cap-weighted way to play biotech (“The IBB”) and an equal-weighted way to play (XBI) without regard to the large difference in weighting schemes. Just saying — there has been a 23% difference in returns between these two “similar” funds over the past year!

Finally, I would like to highlight a particular interview of an ETF sponsor. Without naming names, a more esoteric ETF launched by a firm that currently has only one product (but is approaching $1 billion). This ETF is a terrific idea, designed to take advantage of future trends affecting nearly all industries. From my vantage point, the interview with the CEO was tough, to say the least. The multiple media correspondents interviewing him (three at once) struggled to understand the ETF’s construction (and would cut him off before he could finish explaining). They concluded by borderline discrediting his idea, calling it far out there and almost too futuristic.

Maybe I am being too hard on the media, but I think it is important — and becoming much more important — to recognize the differences between ETFs, what is available, and what is appropriate for individual investors who may have just retired and are spending way too much time watching financial television. Don’t get me wrong; there have been major strides made by some media outlets that have full-time ETF experts on staff (who are excellent — you know who you are). My challenge is for the media to embrace the fact that ETFs are here to stay, and instead of drumming up concerns about the structure, spend some time exploring the extensive ETF universe and covering products with the same respect given to traditional mutual funds.

Grant Engelbart is a Portfolio Manager at CLS Investments, a participant in the ETF Strategist Channel.


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