With about 200 different exchange-traded funds on the market today, their popularity hardly ranks as breaking news. But in what would stand as the most recent in a growing spate criticism against ETFs, The Chicago Tribune suggests that they're not for everyone and that old-fashioned index funds, which arguably occupy the opposite end of the investing spectrum, are the better bet.
Sure, ETFs have their advantages. For one, they can be traded throughout the day without penalty, much like a stock. But with ETFs, The Tribune observes, it's all about being in the right place at the right time, which is why these funds are very risky and most prudent investment professionals avoid them.
ETFs, however, have evolved as a stopgap, or a means for plugging a sector hole in well-diversified portfolio. For example, if a portfolio were lacking in large-cap growth, an investor could use a large-cap growth ETF, such as the Vanguard Growth Viper.
That's the strategy used by many leading investment professionals because it is a lot faster than analyzing and picking stocks. And while mixing ETFs and traditional mutual funds has become a trend lately, it remains the strategy of higher net worth individuals.
Dan Culloton, an ETF analyst at Morningstar in Chicago and the author of "Morningstar ETFs 100," said they're just too expensive. Fees for the average ETF are 0.68% on average and the commission a broker might earn to execute the trade makes them even more expensive than mutual funds.
Chicago financial planner Michael Garrison says that paying $20 to $30 to a broker for a $1,000 investment doesn't make sense. Unless an ETF portfolio has at least $10,000, he added, it isn't cost effective.
So perhaps the newest trend in ETFs is advisers like Garrison, who tell their clients to avoid the flavor-of-the-month and stick to mutual funds.