While exchange traded funds, or ETFs, are a useful invention, we fear investors will get into more trouble with them than they do with ordinary mutual funds. The primarily benefit - low costs and tax efficiency - seem to be falling to the wayside as the other benefits, intraday trading, leveraging, shorting, and ultra-targeting of sub-sectors and investment strategies, take the spotlight.
We've often heard experts opine on how bad mutual funds are compared to ETFs. This is a bit silly as the same mutual fund companies running "evil" mutual funds are usually the same companies behind ETFs. Moreover, to most investors, there is little difference between a Vanguard open end fund and its ETF cousin. In fact, to those buying in relatively small allocations directly through the fund company, ordinary index funds remain the cost effective choice, especially when an investor is adding money regularly.
In response to a reader question about a book called The Lies About Money by Ric Edelman, Eric Tyson, author of Investing for Dummies notes:
"A number of financial advisers are cheerleading for ETFs. In my observation, this advocacy is self-serving, because such advisers have investment-management businesses built around using ETFs. And, in a competitive marketplace, they want to be different and appear current to appeal to novice customers.
In Edelman's case, he has written a purposely provocative and hyped book telling his readers the following:
'The retail mutual fund industry is ripping you off. ... You need to sell all your retail mutual funds. ... The fact is that the retail mutual fund industry is now flush with liars, crooks and charlatans. Daily business activities include deceit, hidden costs, undisclosed risks, deceptive trade practices, conflicts of interest, and fundamental violations of trust — all at your expense. Since September 2003, the retail mutual fund industry has paid out more than $5 billion in fines.'
That does indeed sound pretty awful, doesn't it?
...What's ironic and hypocritical of Edelman's comments is that he said in a prior book, 'I hate index funds.' Well, ETFs are index funds that you trade on a stock exchange!
ETFs are similar to mutual funds, with the most significant difference being that in order to invest, you must buy into an ETF through a stock exchange where ETFs trade, just as individual stocks do.
Thus, you need a brokerage account to be able to invest in ETFs.
ETFs are most like index mutual funds in that each ETF generally tracks a major market index. (Beware that more and more ETFs are being issued that track more narrowly focused indexes, such as an industry group and small country).
The best ETFs might also have slightly lower operating expenses than the lowest-cost index funds.
However, you must pay a brokerage fee to buy and sell an ETF, and the current market value of the ETF may deviate slightly from the underlying market value of the securities in its portfolio."
Fund Bad, ETF Good?
While exchange traded funds, or ETFs, are a useful invention, we fear investors will get into more trouble with them than they do with ordinary mutual funds. The primarily benefit - low costs and tax efficiency - seem to be falling to the wayside as the other benefits, intraday trading, leveraging, shorting, and ultra-targeting of sub-sectors and investment strategies, take the spotlight.
We've often heard experts opine on how bad mutual funds are compared to ETFs. This is a bit silly as the same mutual fund companies running "evil" mutual funds are usually the same companies behind ETFs. Moreover, to most investors, there is little difference between a Vanguard open end fund and its ETF cousin. In fact, to those buying in relatively small allocations directly through the fund company, ordinary index funds remain the cost effective choice, especially when an investor is adding money regularly.
In response to a reader question about a book called The Lies About Money by Ric Edelman, Eric Tyson, author of Investing for Dummies notes:
"A number of financial advisers are cheerleading for ETFs. In my observation, this advocacy is self-serving, because such advisers have investment-management businesses built around using ETFs. And, in a competitive marketplace, they want to be different and appear current to appeal to novice customers.
In Edelman's case, he has written a purposely provocative and hyped book telling his readers the following:
'The retail mutual fund industry is ripping you off. ... You need to sell all your retail mutual funds. ... The fact is that the retail mutual fund industry is now flush with liars, crooks and charlatans. Daily business activities include deceit, hidden costs, undisclosed risks, deceptive trade practices, conflicts of interest, and fundamental violations of trust — all at your expense. Since September 2003, the retail mutual fund industry has paid out more than $5 billion in fines.'
That does indeed sound pretty awful, doesn't it?
...What's ironic and hypocritical of Edelman's comments is that he said in a prior book, 'I hate index funds.' Well, ETFs are index funds that you trade on a stock exchange!
ETFs are similar to mutual funds, with the most significant difference being that in order to invest, you must buy into an ETF through a stock exchange where ETFs trade, just as individual stocks do.
Thus, you need a brokerage account to be able to invest in ETFs.
ETFs are most like index mutual funds in that each ETF generally tracks a major market index. (Beware that more and more ETFs are being issued that track more narrowly focused indexes, such as an industry group and small country).
The best ETFs might also have slightly lower operating expenses than the lowest-cost index funds.
However, you must pay a brokerage fee to buy and sell an ETF, and the current market value of the ETF may deviate slightly from the underlying market value of the securities in its portfolio."
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