The biggest problem with exchange traded funds is the fact that they can be traded, according to Vanguard Funds Founder and index fund proponent John Bogle. The ability to trade ETFs plays into one of the top ten mistakes made by investors. That mistake – trying to time the market. Market timing is speculation, not investing, says Bogle (“ETF Trading: It’s ‘No Way to Invest’ Says Bogle,” Yahoo Finance Breakout). For more information, see What Every Investor Should Know About ETFs.
Mr. Bogle expressed surprise at the fast growth of exchange traded funds. In addition to the problem of tradability, Mr. Bogle warned that sector and country exchange traded funds are too narrow for most investors. He believes that ETF investors should hold broadly diversified index exchange traded funds.
As for leveraged and inverse exchange traded funds, Mr. Bogle says that this is where “the fruitcakes, nut cases and lunatic fringe” operate. The proliferation of exchange traded funds has been in this ultra high risk end of the risk spectrum. Institutions, which own 75% of ETF assets, “play games that they can’t play elsewhere,” such as hedging and short-selling, says Mr. Bogle, which further roils the market.
Investors should stick to investing, and investing is incompatible with most exchange traded funds.
Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.