The Ubiquity Curse

ETFs are investment tools as well as investment vehicles.

Reviewed by: Dave Nadig
Edited by: Dave Nadig

[This article appears in our October 2019 issue of ETFR.]

There’s little question that ETFs have become mainstream. It’s nearly impossible to find a page of the Wall St. Journal or a segment of CNBC that doesn’t at least mention ETFs in passing. Whereas 10 years ago ETFs seemed like the investment vehicle for the cool kids, we’ve reached a kind of ETF ubiquity where even when we aren’t talking about ETFs, they become the shorthand by which the conversation happens.

But how does a grad student or blogger illustrate, say, the correlations between front-month oil, 20-year Treasuries and the stock market?

It’s very likely you actually don’t have access to institutional data platforms like FactSet or Bloomberg. What you do have is access to data about ETFs. Whether it’s or Koyfin or any number of free platforms, punch in the tickers—USO, TLT, SPY—and you’ve got a world of data at your fingertips.

But it’s even better than that: While the front-month oil contract is an interesting data point, it’s theoretical. The United States Oil Fund LP (USO), however, is entirely real world. The performance, expenses and portfolio characteristics represent not some academic idea, but the real-world experience of actual investors trying to get as close to spot oil exposure as they can. Same with the iShares 20+ year Treasury Bond ETF (TLT) and the SPDR S&P 500 ETF Trust (SPY).

ETFs’ inherent transparency has been an unfettered boon to amateur and professional analysts alike, letting anyone with the time and interest crack open every corner of the market to see what’s going on under the hood. They can even implement a strategy using the same tools they used as inputs. That’s cool.

One Size Fits Some
This ubiquity isn’t without issues, however. As this magazine points out, ETFs aren’t great for dollar cost averaging in general, and are a poor fit in most traditional payroll-deduction defined contribution plans for that reason. And there’s a reason there are no target-date ETFs anymore—they never caught on with investors, because most retirement platforms already feature low-cost, highly effective target-date offerings.

The bigger problem, however, is myopia. We all use the biggest, most liquid ETFs as proxies, but there’s a real danger in this shorthanding when you apply it to actual investments. While SPY might be the biggest, most popular ETF, it’s not necessarily the best choice for every investor looking for large cap exposure.

In almost every pocket of the ETF market, there’s a “shorthand” ETF, and then there are the ETFs that are probably better for most investors, based on cost, exposure and construction. Most of these shorthand ETFs became such because they were first to market, often decades ago. Time passes. Things improve.

Great Proxies
So here’s my suggestion: Use the right tool for the job. By all means, use the biggest, most liquid ETFs as shorthand in your analysis. They make great proxies.

But just because ETFs are awesome doesn’t mean they’re fit for every purpose. There’s a good reason mutual funds continue to dominate tax-deferred accounts like 401(k)s. ETFs can still have a place in retirement investing: After all, any 401(k) with a brokerage window and any IRA account can use ETFs to access the diversification found in otherwise-difficult-to-find or expensive parts of the market such as junk bonds, alternatives and commodities. But that’s different than putting $200 a week to work in U.S. equities.

And when you do reach for an ETF, in any context, don’t just assume that the ETF you used as your market proxy is actually the best one for your needs. It might be, but you also might be overlooking some hidden gems just one layer below the surface.

Prior to becoming chief investment officer and director of research at ETF Trends, Dave Nadig was managing director of Previously, he was director of ETFs at FactSet Research Systems. Before that, as managing director at BGI, Nadig helped design some of the first ETFs. As co-founder of Cerulli Associates, he conducted some of the earliest research on fee-only financial advisors and the rise of indexing.