A lot of ETF articles editorialize the flaws of ETFs when in fact the flaws relate to human behavior and not the actual products. This article from MarketWatch seems to realize and acknowledge this.
One point made in the piece, in the form of quotes from people in the industry, is that ETF providers need to do a better job educating investors. This is very true but I'm not sure what kind of progress can be made here. Perhaps one template for how to do this correctly could be from HardAssetsInvestor.com. This is a new site and although it may be difficult to find on the site, Van Eck is running the show along with the gang from IndexUniverse.
There is the potential for conflict in educating investors by focusing exclusively on one product line of funds. It makes no sense intuitively that one company could have the best possible fund for every segment of the market.
Picking and choosing from various providers and various products (a point I try to stress repeatedly) seems to be the most logical.
Another point made in the article is the damage that could be done, image-wise, if there is a disaster of some sort with a fund. I'm not really sure what would constitute a disaster. If a fund company goes out of business the fund assets would still be there and likely be purchased by someone else. Funds have closed before and the assets were simply returned. Is there a fear that someone will loot the funds of their assets? This seems unlikely to me.
But just because I can't think of a disaster doesn't make the point invalid. A disaster of some sort would have a big ripple effect.
My take? Keep it simple. Simple is a subjective term, a fund you use should seem simple to you. A point that I think this article is making is that a lot of people will end up in ETFs they don't understand and will suffer poor performance as a consequence. This is very plausible even if it is not disastrous.
I would add that a lot of the detractors pick on gimmick funds. If you look at the holdings of a lot of them you will see they are simply a different mix of the same stocks with a successful back test. The realistic risk of a fund with a different mix of big cap stocks is that it lags. This risk of lagging is not ruinous by any means, which a lot of MSM fail to point out.
All-ETF portfolios have never been my first choice and they still aren't. Just as one ETF company can't have the best fund for all market segments I believe that ETFs in general can't be the best product for all market segments either.
Wikinvest Wire
4 comments:
Hi Roger,
Thank you for such a wonderful blog. I read your blog on a daily basis. It is one of the best financial blogs out here on the web. I see you are a Boston College fan. As a Michigan State alumnus I was happy to see us win the hockey national championship after a 21 year wait. Congratulations to Boston College on a wonderful season. Good luck to you Roger.
thanks and a bigger well done to MSU.
It seemed like BC outplayed them the whole game or more correctly the first 56 minutes but the Spartans kicked it up when they had to which is what champions do.
I am tired of the ETF bashing. Like any security universe, there will be superior to awful individual issues.
Lumping ETFs into a batch and then torching them seems pretty sophomoric to me.
Roger and a few others do a great job presenting a fair and balanced view on ETFs. More financial professionals need to do likewise.
One reason they are bashed is that with the advent of ETFs, a lot of people benefit who would otherwise have to rely on the bashers to invest for them.
Always look at WHO is doing the bashing.....somewhere, they have an axe to grind.
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