3 Lies About ETFs

As U.S. stocks register new highs and bond yields register new lows, the exchange-traded fund (ETF) marketplace keeps humming along. This is true of ETFs in virtually all asset classes, including not just equities (SCHB), but currencies (FXE), commodities (DBC), and real estate (ICF).

The total assets in U.S. listed ETFs and ETPs reached a record $2.25 trillion at the end of June 2016, while global assets hit $3.17 trillion, according to ETFGI.

Although the global usage of ETFs is clearly growing,  the criticisms about them abound. Let’s examine some of these false assumptions.

ETFs are nothing more than short-term trading vehicles.
The claim that ETFs are one-trick ponies exclusively reserved for daytraders is sometimes used in an attempt to discredit ETF investing.

Although some investors do in fact use ETFs as short-term trading instruments, a significant portion also use them as long-term portfolio building blocks. They do this because ETFs offer significantly lower cost, broader diversification, and better tax-efficiency compared to alternatives.

A 2012 study by Vanguard of its own shareholders found the majority were using ETFs as “buy-and-hold” investments rather than merely using them as trading vehicles.

More importantly, the trading activity of short-term ETF traders doesn’t negatively impact fellow ETF shareholders one iota. And that’s a huge advantage over traditional mutual funds where fellow shareholders can and do impact the tax and financial situation of each other.

Vanguard 2012 ETF Study

ETFs induce self-destructive habits.
A popular argument against ETF investing is that they trick people into self-destructive behavior. This includes hyper-active trading, investing in non-core asset classes like volatility (VIXY), and investing in leveraged products that go long or short.

ETFs can be likened to the the modern day automobile. Is there anyone who would argue against the fact that automobiles have greatly increased the comfort, speed, and convenience of travel? Despite these significant advantages, car accidents happen. And in the vast majority of cases, it’s the drivers that are at fault for crashing – not the automobiles!

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Disclosure: None

Disclaimer: Ron DeLegge has analyzed and graded more than $125 million with his Portfolio ...

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Ron DeLegge 4 years ago Author's comment


You're 100% correct, I'm biased! Glad you picked upon this. And more specifically, I'm biased toward a) indexing a person's core portfolio and b) using #ETFs as the building portfolio building blocks.

Finally, it's OK to have financial biases, so long as those biases are correct and firmly rooted in improving the odds of long-term investment success.

Beware of financial pundits or advisors that say they're "unbiased." Why? Because he who stands for nothing, will fall for anything.

Carol W 4 years ago Contributor's comment

Hooey- of course you're biased. #ETF's, since their existence have made the market far more volatile along with #algos and #HedgeFunds.