ETF Investing Isn’t Scary
The Dynamic Wealth Report
July 19, 2011
by Corey Williams, Editor
Longtime
readers know my passion for teaching investors about ETFs (Exchange
Traded Funds).
I regularly touch on a variety of ETF topics. The Dynamic
Wealth Report archives are filled with articles about exciting new
ETFs, the benefits of investing with them, and even specific ETF
investing ideas.
Apparently my job of spreading the word about ETFs is far from over…
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According to
the Investment Company Institute (ICI), “only 5% of households owning
mutual funds also owned ETFs.” That’s shockingly low…
Just about everyone with a 401k or some other type defined contribution
plan invests in mutual funds. After all, mutual funds are usually
your only investing option in a 401k…
And of all the people, with an eye-popping $4.5 trillion invested in a
401k, only a handful of them are investing in ETFs. But here’s the
catch… The ICI also said those who use ETFs tend to be more
affluent and sophisticated investors.
I have to ask…
Are ETFs only for affluent and sophisticated investors? Or, are
investors sophisticated and affluent because they use ETFs? (Just
something to think about…)
Either way… the fact that so few people are currently using ETFs is
disturbing to me.
And a recent study of the ETF industry by Bank of New York
Mellon (BK) and Strategic Insight really touched a nerve with
me. They said the “biggest challenge to ETF growth is… a lack of
understanding of ETFs and how the work.”
So, I’m here to pound the table again about ETFs. But this time
I’m going to take a slightly different approach. I’d like to
dispel a few myths plaguing the ETF industry.
You see, just the other day I was listening to the local financial radio
station on my way home from the gym. The supposed “experts” on the
air were bad mouthing ETFs.
When I heard them say ETFs were too risky, volatile, and complex for
most investors, I nearly yanked my car into oncoming traffic in
frustration!
They pointed to last year’s “Flash Crash” as evidence ETFs were risky.
On that horrifying day last May, the Dow lost more than 900 points in a
matter of minutes. Then just as quickly, it recovered the majority
of those losses.
During the Flash Crash, many stocks and ETFs momentarily traded at more
than 60% away from their value. Many of the trades were later
canceled. And ETFs represented 70% of the broken trades.
After I calmed down, I looked into what they were saying. And the
truth is ETFs had nothing to do with causing the disruption. They
were simply a victim of high-frequency trading gone haywire.
In fact, ETFs were no different than Proctor and Gamble
(PG). That day one the sturdiest blue chip companies around fell
from more than $60 to a low of $39.37 in less than four minutes.
The way I look at it, PG isn’t too risky or volatile because of what
happened during the Flash Crash and neither are ETFs. In fact,
making an argument for or against the entire ETF industry based on one
day is just plain stupid.
The bottom line is investing in anything comes with a certain amount of
risk. But investing in an ETF isn’t inherently riskier because of
the way ETFs work.
So put aside the unfounded fears and jump aboard the ETF bandwagon.
After all, the 5% of mutual fund owners who take the ETF plunge tend to
be more affluent and sophisticated investors. And isn’t that why
we’re all investing in the first place…
The US IPO market is kicking into high gear. In fact, there’s a backlog
of new stocks waiting to hit the markets before Labor Day. This week
three new offerings are planned. One of them is from Skullcandy (SKUL),
an edgy headphone maker intent on mixing music, fashion, and action
sports lifestyles.
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