Last Updated: 19 March 2023
Paul—you’re right when you say that there’s nothing wrong with these products, but there are serious issues to address.
It is somewhat ironic that even as exchange-traded products have made a wealth of outstanding, institutional-level asset-class exposure available to all, they’ve also thrown more confusion into the mix. And I’m not exactly sure what to do about it, to answer your question. The trade-off we are looking at is between more access to better products to more people and protecting investors from themselves.
As I’ve said repeatedly, if you know what you’re doing, these are the glory days for the asset-allocation-focused investor. We’ve got more inexpensive, tax-efficient products accessing more investment areas than ever before, and that’s got to be a good thing. And sophisticated investors ARE capable of understanding, say, how futures markets work, or how daily leverage works, or complex tax differences. But many of them won’t, or won’t bother.
For my own part, I would NOT like to lose a lot of good products to protect the uninformed from themselves, but it truly IS interesting to ask whether more investors are being helped or harmed by some of these products. Markets generally have made a decided shift toward traders and trading, and the more frenetic the trading activity, the more damaged the investor, as a general rule. Trading has reached insane levels of 3X or more than the volumes of 10 years ago, and ETFs—mostly fully transparent, NON-complex ETFs—have made up to 40% of that volume. So even at the most innocent, most unrelentingly simple and transparent part of the market, the case can be made that the tradability is helping investors trade themselves into losses.
And at the complex end, I’ve heard too many nightmare stories of uninformed investing with significant money, to be under the illusion that everyone in these complex products is reaping the investment windfall that I feel I am.
It IS legitimate to look at the greater good. And investing—capital markets SHOULD be about (I agree with Dan McCabe’s article in the current issue of the Journal of Indexes) long-term investors and the raising of capital. Speculation I see as a necessary evil of efficient capital markets, not its primary driver.
But that brings us back around to where we started, doesn’t it, Paul? The answer is education (and we, and the industry—some parts of it more diligently than others—are working hard at that). If you don’t “get” it, don’t do it. If you walk away with ONE lesson about ETFs, make it the lesson of old-school index investing. Do these simple things: 1) Make a sound financial plan, 2) Save Money, 3) Invest in a broadly diversified portfolio, 4) Invest at lowest-possible cost, 5) Stick to your plan and hold, hold, hold.
That simple plan will put you ahead of 80% of other investors. Let’s not lose sight of that as we delight in and debate all of these new offerings.
BTW Paul, I can’t wait to hear your thoughts on Rob Arnott and the fundamental crowd. We’ve been having a lot of fun with Rob (who will contribute to the May/June issue of the Journal of Indexes, which will be a real tour de force of the most senior people in the world around fixed-income indexing (plus Rob) 🙂 looking at a lot of the very messy issues we’ve seen in those markets of late. Who ever thought we’d see people talking about flocking to the short or double-short U.S. Treasuries fund?