Exchange-traded funds (ETFs) started out linked at the hip to low-cost, market-tracking index funds. The only ETFs available during the 1990s were those that followed well-known benchmarks such as the S&P 500 (ticker: SPY) and the Nasdaq 100 (ticker: QQQQ). That’s no longer the case.
A friend recently bought the Vanguard FTSE Europe ETF (VGK) after reading an encouraging report of growth in that region. He commented that he only uses exchange-traded funds (ETFs) today because he can “get his money back faster” than if he bought a mutual fund. That led to an interesting conversation about ETFs.
John Bogle is the country’s most vocal critic of exchange-traded funds (ETFs). The founder of Vanguard and the father of index funds has called them everything from suicidal to handing an arsonist a match. Yet, despite Mr. Bogle’s distain for ETFs, they have probably done more to popularize his investment philosophy than anything else in the past ten years.
The net expense ratios of exchange-traded products (ETPs) continue to creep higher. The average net expense ratio (ER) grew from 0.61% to 0.62% during the 12-month period ending in June 2013 according to data provided by Morningstar. The increase is a result of new product development that has focused on more complex strategies and alternatives to stocks and bonds.
Exchange-traded funds (ETFs) that follow indexes are about to meet a new competitor. Soon there will be self-indexed ETFs that don’t follow any published index. They’re secret. Only the fund providers themselves will know how the index is constructed – and what’s in it – even though the ETFs will market the products as passive indexing.