Three ETFs I Would Not Invest In

August 03, 2007

It's a catchy title isn't it?  This is the question that CNBC proposes to ask me on my upcoming Monday appearance.  What are my selections?

Well, you'll have to tune in on Monday or Tivo it.  But what worse question could they be asking me?  I'm very pro-ETFs generally - even pro most of the 75 basis points and alternatively-structured ETFs, as I mentioned in my last blog.  But it looks like it's pick-on-ETFs time for the national media. I guess success breeds contempt.

What's lost in all of this is that ETFs pretty much kick the behind of every equivalent traditional mutual fund in terms of structural efficiency and cost...and so ultimately tracking of the relevant index.

But don't worry - it's not all rah rah on ETFs - I definitely do think there are areas where the business has overextended itself and in the rush to launch products and gain assets have not always served investors ideally.  And I think the level of education going on, particularly around some of the more esoteric products is abysmal. 

Nonetheless, even some of the ETFs that are perceived as most problematic have some pretty good reasons for their "issues"  Matt's pointing out the roll issues that futures-based funds have run into with contango is one of the leading misunderstood factors that comes up.  Their problems, if you want to call them that, are simply the problems of their underlying portfolio, by and large. 

Contango, and the brutal tax treatment are really just a product of what these funds hold.  And you'd be well served to actually understand what you're buying instead of just be buying a story.  The levered funds, "active" funds, super-thinly sliced funds and even gold to some degree all fit into this category.

But yeah, I won't hide the fact that I pretty much love them.  And I as an investor (even in the midst of greater confusion in the market) have more efficient access to more asset classes at a lower cost than I did even 2 or 3 years ago.  And I'm talking about access to asset classes that work for buy-and-hold asset allocating investors.  Commodities, gold and currencies, real estate here and abroad, and more international size and style...and interesting offerings keep coming. 

And while I'll never buy many of them, they often have uses for certain types of more trading-focused investors, who can access the funds without damaging the returns of those who do chose to be long the funds for long time periods. The problem is mostly in education, and possibly in a few ill-conceived products. But it's hard, by and large to criticize an industry that has brought better structure at lower cost to investors. Make no mistake, I'm a convert.

So I thought I would just make all that very clear to all you ETF issuers out there.  Remember that while I savage you on CNBC this Monday...  

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