Tom Bradley, CEO of Steadyhand Funds, shared his thoughts about ETFs in a Globe and Mail editorial, April 16, 2010. His thoughts are relevant and worthy of consideration: In a nutshell, Bradley says
1) that ETFs are not all as simple as they've been made out to be,
2) they're not so predictable,
3) their fee halo sometimes shrouds hidden fees,
4) they can sometimes be illiquid, and don't always trade at a price (or at NAV) that is fair to the average investor,
5) 90% of the offerings are suitable for 10% of investors
6) talk of ETFs is often over-generalized.
Not that simple...
Will I own stocks, commodities or derivatives? Is there any leverage? What index is the fund replicating? Is it currency hedged? How well does it trade? Are there other fees or costs?
In the rush to catch the wave, the ETF providers have cluttered what was a pristine landscape just a few years ago.
Not so predictable...
And in general, the tracking error of ETFs (the amount a fund's return diverges from that of the target index) have widened over the past few years. According to the Wall Street Journal, U.S. ETFs on average missed their targets by 1.25 per cent in 2009, more than double the 2008 gap.
Their fee halos...
Despite the trend to higher fees, there is still a halo around ETFs. This was particularly noticeable recently when some actively managed ETF's were rolled out and the 20-per-cent performance fee was hardly mentioned in the commentaries.
They trade at a price, not NAV...
However, many of the new funds are extremely illiquid and require trading experience to ensure that the price paid is at or near the value of the fund. For long-term investors who are looking for cheap, broad-based market exposure, negotiating a trade in the open market and paying a brokerage commission is not always so great a deal. For some, buying a mutual fund after the market closes at net asset value (calculated to four decimal points) may be more appealing and practical.
The 90/10 Rule...
It's all about market timing, sector rotation and trading. In other words, we have arrived at a point when 90 per cent of new offerings are suitable for only 10 per cent of investors.
Let's stop over-generalizing...
We can no longer naively say that ETFs are simple, low cost, index-based, tax efficient and have a trading advantage. Or conversely, that mutual funds are none of those things. It's time to stop generalizing and go back to the beach in search of the next wave.
Source: The Globe and Mail, ETF providers have cluttered a pristine landscape, Tom Bradley, April 16, 2010
