While the first exchange traded funds were liquid investments tracking broad-based stock indexes like Standard & Poor’s, MSCI and Dow Jones indexes, they have since morphed and mutated into a jungle of extremely high risk products that cater to the worst instructs of investors according to Vanguard founder John C. Bogle. Mr. Bogle who invented low-cost mutual fund investing, is not a fan of most exchange traded funds and observed, “Some kind of monster was built out of what I created.”
Ari I. Weinberg reports in his SmartMoney.com article, “3 Signs That ETF Isn’t For You,” that UBS now disclaims on the front page of its prospectuses for the volatile exchange traded notes it still offers investors: “YOU SHOULD NOT INVEST IN ETNs. THE ETNs ARE NOT INTENDED TO BE A ‘BUY AND HOLD’ INVESTMENT.”
It could have been plainer. It could have said, “IF YOU ARE AN INVESTOR, DO NOT BUY THIS PRODUCT.” An investor buys and holds until there is either a fundamental reason to sell or the sale is part of maintaining the desired allocation of stocks and bonds. Anyone who does not “buy and hold” is a trader.
So, simply being an investor is one sign that the more extreme and exotic exchange traded funds are not for you. If you need other reasons, Mr. Weinberg’s article provides them: (1) “You’ve Never Heard of the Index” (or you do not understand what it tracks or how it tracks whatever it is that it tracks); (2) “You Don’t Understand the Terms or Strategy” (i.e., you have not read and fully understood everything in the prospectus ? try that sometime and you’ll see it is not meant to be understood); and (3) “You’ve Never Sold Short or Bought on Margin” (Weinberg is referring to leveraged and inverse ETFs that purport to multiply the return ? or the opposite of the return ? of a benchmark, but paradoxically can result in losses when the benchmark gains).
Investors interested in exchange traded funds should stick to exchange traded funds that mirror a broadly diversified index such as the Standard & Poor’s 500. Such exchange traded funds offer liquidity, transparency, low expenses, diversification and tax efficiency, unlike the extreme and exotic varieties.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in investment litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving exchange traded funds. For further information, please contact us.