The return to active management.....after the upcoming market crash

Empowering retail investors is always a novel idea. The problem - they are mostly lazy. The use, or incorrect use, of ETFs has become so commonplace it's alarming. I feel like this product is most useful to day traders, institutional investors, or anyone else trying to express a short term thesis through buying or selling a basket of similar items. The problem is that most mom and pop investors feel like they are saving some extortionate management expense ratio that was once attached to many funds, but here's the rub. Buying the whole market means that you are also buying all the rotten fruit along with the choice cuts of meat. Sure, you can buy everything without commission and low maintenance because there is no labour involved to separate the wheat from the chaff.

Main problems with ETFs for retail investors: 

1. You buy the whole market, the bad with the good. This means you are certainly overpaying for some of the companies in the basket.

2. Unlike traditional products offered in this space, ETFs are constantly re-balancing without prejudice.

3. During the next massive selloff all of the money from main street that would normally sit tight during panics in mutual funds will be contributing to the cascade of selling through ETFs.

Good luck with your robo-advisor, but I feel like the narrative is always more important than the numbers.

ETFs didn't start the fire....but they certainly won't help to put it out!


Popular posts