ETFs - the Devil's Work

June 06, 2007

The easiest way to get someone to read something is to be controversial.  Any fool knows that. Indexing is for communists. Buy and hold is for suckers.  ETFs are the devil's work.

It's that last one that we seem to be hearing the most of lately.  ETFs are distorting markets, ETFs are wildboy toys for hedge fund boys, ETFs can't track, they're too thin, too volatile, too expensive, too complicated.  ETFs are too illiquid. Cap weighted ETFs load up TOO much on the superliquid overpriced stocks.  They're too easy to trade.  You can't trade them well enough.  The fact that you can short them encourages more market speculation. They're too HARD to short.

I guess you can't win.

The fact that I can't get around for all the NUMEROUS faults of the overenthusiastic overly bubbly industry is the fact that I as an investor am unequivocally way better off with all the ETF options than I was 5 years ago, 3 years ago.  I can now buy commodities and real estate at much more reasonable prices that I could until recently...heck until recently gold bullion and commodities were really inaccessable asset classes as far as I was concerned. 

The ETF industry, for as much criticism as it's taken, has forced real price competition, not only among index funds, but into the wider investing world, where their pull of assets has gotten more than casual notice.  But my measure is in what they do for me. Which is more.  No one is forcing me to be an idiot and sell my funds every three weeks.  No one is making me put 40% of my portolio into water and silver.  The gist of it is that I've got more options at better prices with more certain tracking than I've ever had before.

And it's ETFs that have done that.

So yeah, sometimes I'll take pot shots at some of the trends, but it's hard to argue with the main ones, which are that the extraordinary level of innovation had opened up more asset classes to me at lower prices.

Now whether or not the net result for the average investor is positive or negative - we'll leave to Jack Bogle and Jonathan Clements to debate.  People have a long history of being morons - which far predates ETFs or indexing.  And remember- 90% of them are still buying into active management that by and large has a terrible track record.  And even the big "smart" money has poured into 10,000 hedge funds charging 2 and 20.

So Hougan - stop making all these gratuitous attacks on ETFs in the national media.  We know you love the glamour.  But when did TRUTH stop meaning something to you?  When did it become all about fame and fortune and a flock of indexing babes?  Somewhere you lost the magic, the belief that we were really a part of something special, something that could change the world.

I believe in ETFs.  Do you?

 

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