Nadig: Celebrating An ETF Independence Day

July 03, 2014

In celebration of investor independence and the liberty to pursue ETF happiness...

I consider myself a pretty patriotic guy. Thanksgiving and the Fourth of July are my very favorite holidays. Most years, I participate in a small-town tradition—a reading of the declaration of independence, followed by swimming in the local lake and an old-fashioned barbecue.

I like to think that the reason we celebrate the Fourth of July is less about some sort of thinly veiled jingoism “America! Yeah!” and a bit more about the ideals our forefathers fought for—in short: liberty, the pursuit of happiness and the consent of the governed.

Is it a stretch to think there’s an ETF angle in this? Perhaps, but forgive me the conceit for a minute. Think about the battle that’s been going on for the heart and soul of investing these past 30 years. Matt and I called it a battle between good and evil when we kicked off the year, and I still feel that way.

At its core, liberty is about choices. It’s no guarantee of a good outcome; it’s simply the removal of impediments to self-directed prosperity. Liberty is what makes the pursuit of happiness possible.

ETFs have been an incredible force for liberty in the investing world. Ever since Nate Most cobbled the idea together 20 years ago, the core idea of the ETF has been to get as much garbage out from in between the investor and the market. No 12b-1 fees clogging up your returns. No active management that over-promises and under-delivers. Just the cleanest possible exposure at the lowest possible price.

But ETFs have gone beyond just being cheap packages. They’ve fundamentally changed the way we think about investing in three key ways:

1. ETFs Have Individualized Investing

Think about what it means to have the “consent of the governed.” It means that the big no longer holds sway over the small. In investing terms, it means being in control of every aspect of my own portfolio.

In this regard, the traditional active mutual fund is King George. Mutual funds remain one of the least fair structures ever created. If you want to move in and out of the fund six times this year, I pay your transaction costs, as the fund manager buys and sells securities to deal with your indecision.

Worse, I’ll end up paying taxes for all those capital gains you incurred. Talk about taxation without representation.

The ETF puts individuals back in charge of their own fate. Don’t trade much? You won’t pay for transactions you aren’t making. Don’t incur any capital gains, or better yet, want to harvest some capital losses? You win. There’s nobody at the fund company, or other investors in the fund, messing you up.



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