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In the price war being waged by U.S. brokerages, the biggest battle looks to be that for ETF (exchange-traded fund) dominance. Just this week, both Fidelity and Charles Schwab announced they would each expand commission-free trading to hundreds more ETFs. Why are ETFs so important for brokerages? Much like your student council elections in middle school, this is a popularity contest—and low-cost ETFs have become popular enough to attract about $3.3 trillion in assets as of the end of December (plus 91% of millennials said ETFs were their choice investment vehicles last year). But that’s where the fun ends and the Hunger Games begin, according to Bloomberg’s Barry Ritholtz. “New [ETFs] must endure a brutal Darwinian struggle for attention and assets...new ETFs need a good investment idea and a catchy marketing approach,” he wrote. One example is the VanEck Vectors Agribusiness ETF (symbol MOO). It’s attracted about $765 million since its 2007 introduction. Zoom out: The average ETF lifespan is 3.4 years, per Bloomberg Intelligence. Do you have any ideas for a catchy ETF?
The markets are way up. Should I avoid both indexed and active managed ETFs right now? My investment style is long-term, high and moderate risk. Cody Shirk, Surfer, Capitalist, Contrarian, Traveler, Entrepreneur, Investor codyshirk.com Answered Jul 23 Yes. You should be very careful. (Great question, by the way! This is the “Passive Investing Bubble” that many are worried about.) Most aren’t considering the risks that accompany index funds and ETFs. In fact, most people think that those two investment vehicles have no risk. Just like the housing market didn’t have any risk in 2006… Let’s take a look at the largest ETFs: Source: ETFdb I’ll pick the largest ETF, $SPY, as an example. $SPY is by far the largest ETF with almost double the assets under management than $IVV, the next largest. So what is $SPY? What equities does the ETF hold? Well… that’s easy to find out. Here are the top ten holdings: Source: SPDRS Looks good, right? A fairly balanced mix, with no huge allocations to one company. That means the ETF is completely protected from a market crash… because it’s so diversified… right? WRONG. Do you know what happened during the housing crash? Basically, the crappy home loans of thousands of homes were spread out among many securities… hence the name “Mortgage Backed Securities.” But not many people were worried because these crappy mortgages (that people might not pay back) were spread out. So, even if a bunch defaulted, then it wouldn’t effect anything. Well, we all know what happened. BUT THIS SCENARIO IS TOTALLY DIFFERENT! (I can hear you saying that!) Well, that’s kind of true. We don’t have a bunch of toxic mortgages floating around our financial system. But, we do have A TON of money investing in passive investing vehicles like ETFs and index funds. “This concern is rooted in the very nature of passive funds: They buy stocks without considering the fundamentals.” Source: LATimes And guess what those ETFs and index funds are buying? They are buying the top companies in our stock market, which are expensive by a variety of measures. So the ETF and index fund you may be invested is definitely diversified… but it’s diversified among a bunch of expensive companies! BUT THAT’S NOT THE MAJOR PROBLEM… The problem here is liquidity. Liquidity is a word I know we will all be hearing more about. If you are an experienced stock trader, then you should be very familiar with liquidity. Basically, liquidity is the ability to buy and sell an equity… or really anything. You’ve got to have buyers and sellers to make a market work. What will happen when those equities in those ETFs and index funds start to lose value? People will start selling. And then more people will sell. And then more. Pretty soon there will be large numbers of people who want to sell and there will be no BUYERS. That’s because all the buyers have either lost their money from the falling ETF and index fund prices OR they are the major funds who have seen this scenario unfold from a mile away. (They’re just waiting for everything to fall, so they can pick up the pieces.) There are 2 arguments to the above: #1 This is all wrong, and I don’t know what I’m talking about. Answer: Maybe. Let’s see what unfolds in the near future. #2 It doesn’t matter when you buy an index fund, because you hold it over the long run… market fluctuations don’t matter in the bigger picture. Answer: True. But, I’d much rather buy when things are cheap and ride the wave up than buy when things are expensive and wait years to get back to where I started. ***It’s important to note that not all index funds or ETFs are at risk right now. For example, $URA is a uranium ETF. Uranium is trading at historical lows with not much room for a major price fall.
The use of exchange traded funds (ETFs) has increased rapidly in recent years. If you're just getting started with ETFs, here are a few basics to help get you oriented on these convenient, low-cost, flexible funds. One: ETFs and mutual funds are similar in many ways, with several key differences. Like mutual funds, ETFs are bundles of securities, such as stocks or bonds. Both ETFs and mutual funds make it easy to gain exposures to a wide range of markets. A key difference between ETFs and mutual funds is how they are bought and sold. Mutual funds are traded directly with the fund company and shares are priced once a day, after the market close (4 p.m. Eastern). ETF shares, on the other hand, can be bought and sold throughout the day at market price when the market is open, just like a stock.1 Two: They have been around for a long time. ETFs have been widely covered in the media over the past few years, but they are not new. U.S. stock ETFs have been around for more than two decades, and the first bond ETF was introduced in 2002. Today, ETFs have grown more than $3 trillion worldwide,2 as all types of investors turn to them to meet a wide variety of financial goals. Three: ETFs are cheaper to own than the typical mutual fund. Costs have a direct impact on your bottom line. Many investors are drawn to ETFs because they're generally cheaper to own.3 Those savings can really add up year after year. Also, if taxes are a concern, many ETFs have historically had lower taxable capital gains distributions than mutual funds.4 The result? ETFs may help you keep more of what you earn. Four: ETFs come in virtually any "flavor" you can think of. You can choose from more than 1,800 ETFs5 in the U.S. alone. ETFs are designed to help with a wide range of investment goals, including: Core building blocks tracking major U.S. and global stock and bond markets Exposure to specific sectors, countries, or other parts of the market Targeted objectives such as generating an income stream or minimizing volatility Combined with their low costs and ease of use, ETFs are a very versatile investment product. Five: Choose your ETF provider as carefully as you choose your ETF. There are a lot of ETFs out there, but they aren't all created equal. Just like with mutual funds, two ETFs may sound similar, but behave quite differently from each other. Factors such as fees, tax and trading costs and index management can all affect performance and returns. So when choosing individual funds, investors should also do some due diligence on the fund providers. Among the traits to look for: a proven record of strong ETF expertise, a commitment to quality, and enough scale to make trading efficient and liquid.