Keeping on Track

May 19, 2007

I'll leave the relaunched site introduction to Matt Hougan, the editor. I'll jump right in with some more bloggish thoughts, in keeping with the medium. We've written some pretty lively things lately that have gotten a lot of response.

Probably of these the strongest response in email volume has been the cover of the latest issue of ETFR that I wrote. It was essentially a rebuttal of a March 17th WSJ analysis of the late February market collapse and how ETFs had "failed" on that day. If it had not been written before St. Patrick's day, I'd have thought they had a tipple while putting it together. By and large the mail has been overwhelmingly, well, pro-ETF. It had simply seemed to me at the time to be so absurd, given the data that I was compelled to immediately respond.

Here is a link to the full article - it's from the May issue of ETFR, which is of course a paid publication - but for those nonsubscribers among you, I'll give you the free read.

The article was strongly worded (I think the word "retraction" was used) but I did give the authors a heads-up. We have not heard back from them since, though we'll keep the channels open - because I think that if there's one thing the wider public needs - and is missing - it's more accurate information about ETFs and the ETF market.

Anyway, the gist of it is that, well as far as I can tell, the ETFs that were singled out performed to perfection on the day(s) in question. The place I would NOT have wanted to be on those days would be trying to get into a TRADITIONAL fund that was not fair value priced (if I was going in) & was priced high on yesterday's China close. And in alternate market conditions (with markets moving up) you wouldn't want to be an existing shareholder in a traditional mutual fund, with hedge funds getting in cheap and it costing your shares directly.

So I wrote that, and the chart is really almost comically smooth and the WSJ presentation was shoddy, so I felt like we pretty much nailed it.

However, then I spoke with Ian Salisbury from DJ Newswires, and it was obvious the article had made it's way around at DJ (I'd also spoken at length w/ Jonathan Clements about it, and he recently had done some writing about ETFs). Our conversation did give me some pause.

Here's what Ian said that he thought there were two sides to the story, and that I was completely correct, but that most people don't understand the issue. I started to think there must be a point if two relatively sophisticated financial reporters had come out with an outline of that (mis)understanding. Again to me, it's faulting the markets and is really about investors' basic understandings of the market. I mean if you held all tech stock in early 2000, you were misinformed about the risk you were taking. If you sold in the middle of the market dive, you were diving out in panic, whether you were jumping out of the Dow or the FTSE Xhinhua iShare. The ETF was the market. And the market was DOWN mid day & came up after.

The thought was that China was only down 2% the day before and closed only 3% down the day after (though it was not mentioned that it opened in china 6% down) but the ETF had traded down as much as nearly 10%. Well, it's just like if you sold around the low intraday with a U.S.-trading stock. The idea that the ETF failed somehow just strikes me as absurd.

But to someone who saw that they'd sold 9% down and that the Chinese markets never dipped that much, I could understand it with them not being able to put it in context. What I don't agree with is that this is some kind of generated-volatility-hedge-fund-conspiracy or something like that - which seemed to be the allusion. ETFs are free markets, and are as insulated a fund structure as you can get from that sort of activity.

I'll take my chances with open markets over static pricing anytime.

So I don't know how much of an apology that is. But I suppose I can muster up some sympathy, the same way I can for John Bogle's position that ETFs encourage more trading. I suppose I'm taking the view of the educated, thoughtful investor who understands the products and can just pick the best one and hold it until his asset allocation model tells him to sell it.


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