This I Believe

June 08, 2007

A little media envy, Jim? You must be referring to this WSJ article, where Eleanor Laise outlines some of the things investors should “watch out for” in the ETF space.

The truth is, I was slow to respond to your taunts because I was busy putting together the latest edition of ETF Watch. You know … working, reporting, helping investors understand the ETF space …

Anyway, that report is a doozy. There are, by my count, 342 ETFs and ETNs in registration at the SEC, in addition to 533 already trading. And as you suggest, there are more coming. Just off the top of my head: hedge fund replicators, 130/30s, VIX (which, done right, could replace gold as a portfolio anchor), real estate pricing, and more.

All that’s for the good for investors: more choices, lower costs. So to answer your question, yes, I believe in ETFs. Big time.

BUT … and this is a big BUT … there’s a flip side to that story.

As we’ve opened up more sophisticated strategies, we—meaning the media, product issuers, and regulators—haven’t done enough to educate investors about how they work.

  • Contango? Is that a dance?
  • The tax consequences of gold bullion? Huh?
  • The real leverage of the ProShares ETFs? Double the returns, right? (Answer: Not exactly…)
  • BuyWrite? Buy what?

As strategies get more sophisticated, the burden of education rises, and the current regime of legalese prospectuses doesn’t get it done. It’s not a good sign that it took me a full day of reading and phone calls to all the principals to figure out the correct tax treatment of the CurrencyShares ETFs vs. the new currency ETNs.

These new ETFs are great, but we need to make sure that everybody understands how they work … with explanations in “plain English” … so that even a “pretty boy” like me can figure it out.


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