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.
I’m often asked to recommend a simple index fund portfolio for people who are just getting started with passive investing and want to learn the basics. There are several good portfolios you can build to suit your needs using a few funds that require little maintenance. Balanced index funds are also a good option for people who don’t want to do any maintenance.