As I write almost exclusively on the topic of ETFs and mutual funds and have a website called ETF Focus, it’s probably not difficult to assume that I’m an ardent defender of ETFs and how they’ve become perhaps the single best thing to happen to the average investor since, well, the mutual fund! With total ETF assets having just passed the $3 trillion mark at the end of March, I think it’s safe to say that ETFs have found their place in the investing community.
Which is why I was a little surprised when I found multiple articles this weekend talking about the problems with ETF investing and why, in some cases, investors should avoid them altogether. To be fair, I don’t think ETFs are perfect investments. Some funds have unnecessarily high fees, are overconcentrated or target incredibly narrow market niches. Leveraged and inverse ETFs also have the potential to cause trouble if they’re not used properly. But overall I think the evolution of the ETF industry has been a very good thing for investors looking to target specific strategies or markets. It’s also been great for folks who aren’t money savvy and are just looking to make a simple long-term investment.
In order to be fair, I think it’s worth examining some of the criticisms of ETFs pointed out in these articles to determine if, in fact, they are problematic. The funds I listed above are examples of where I think the underlying issue is the fund itself, but I believe the massive exodus from actively managed funds over to passive index funds is creating a few unintended consequences that should be considered.
I want to take a look at four major issues brought up in these articles one by one to try to determine the scope of the problem and if I think there even is one.
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