By Tom Bradley
On efficientfrontier.com, William Bernstein recently published an article titled ‘Comin’ Around Again?’ in which he made some comments on the proliferation of ETF offerings in the U.S. I think it serves as a good follow-up to our earlier postings on the subject.
As we’ve noted numerous times, we are fans of the original ETFs. These are the ones offered by Barclays that provide investors with broad market exposure at a cheap price. We have advised caution, however, in face of the numerous specialized funds that are coming to market which carry higher fees and require that buyers have more investment knowledge.
The following two paragraphs from Mr. Bernstein’s column capture our concerns perfectly.
“A few weeks ago, Jim Wiandt, the founder and publisher of Journal of Indexes, sent me, almost tongue-in-cheek, a listing of ETF issuances expected for later in the year. The list boggled the mind. Aside from the usual single country and slice-and-dice packages, there were, I kid you not, funds based on nine different NAREIT benchmarks (TB: these indexes track the REIT industry), a "Dynamic Brand-Name Products Portfolio," an Inverse Materials ETF, a Healthy Lifestyle fund, an Elliott Wave ETF, a Georgia (the state) ETF and, my favorite, an "Ultra-Short S&P 400 MidCap 400 Citigroup Growth" ETF. I began counting and lost track at 500.
Over the years, I’ve learned that disagreeing with Jack Bogle is not a good idea. I originally thought his view of ETFs was unduly alarmist: little speculative cherry bombs with which investors could blow up their savings. After all, the first Barclays products sported minuscule fees and mirrored most of Vanguard’s market-segment offerings - surely, they would be carefully assembled into efficient portfolios with a long view out to the horizon. And once again, the Sage of Valley Forge won the point: As the splinters get thinner, they grow sharper, and the odds of folks hurting themselves with these pointed objects now approach one hundred percent.”