With their low fees, all-day trading and tax efficiency, exchange-traded funds (ETFs) have captivated investors. There were no ETFs before 1993, and only 80 in 2000. By the end of 2006 there were 359. Today, there are nearly 700, including 280 launched in 2007 and 30 through mid-March this year. They hold about $600 billion.
While most experts think ETFs were a good innovation -- built like index-style mutual funds but traded like stocks -- some worry that the increasingly specialized ETFs introduced in recent years stray from the faith, encouraging too much risk-taking.
I use a lot of ETFs in our portfolios but I generally stick with the broad market or large sector ETFs. The original idea behind the ETF was to construct a better index fund and Barclay's IShares have done a great job of that, but even they have started to drift from the original purpose by developing ETFs that track ever smaller slices of the market. That's okay for folks who want to speculate but as a long term investor, I tend to agree with John Bogle:
That concern is heightened for some by recent Securities and Exchange Commission proposals to let new funds come to market with less oversight, and to invite proposals for introducing actively managed ETFs. Like actively managed mutual funds , these would employ teams of stock pickers and analysts trying to beat the market's gains rather than simply match them, as today's ETFs do. "I can't imagine anything more absurd than an ETF that is [actively] managed," says John C. Bogle, retired founder of The Vanguard Group, the leader in index-style mutual funds and ETFs.
Bogle is equally critical of the now-prevalent class of narrowly defined ETFs, which typically focus on stocks of specific industries or countries. "They are great for brokers," he adds, noting that narrow ETFs appeal to speculators who buy and sell frequently and pay lots of sales commissions. "The question is, are they any good for investors?" Most small investors, Bogle argues, do best by choosing a handful of broad-market index investments and holding them for the long term.
This article is also a great primer for anyone who wants to gain knowledge about ETFs. Read the whole thing by clicking on the title of this post.