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Thread: ETFs are for suckers!

  1. #1

    ETFs are for suckers!

    Here's a provocative article from Charles Plowden, fund manager of MNKS.

    Given the recent passive vs active debates, I thought it worthy of discussion.

    ETFs are for suckers!

    I'll be the first to say, he would say that wouldn't he?

    The big question is what happens if there's a crash? I didn't start investing until 2009 when the market was at its low point so I've no real experience. Currently, I'm roughly 50/50 between OEICs/UTs and ITs but I do hold one ETF, VWRL. Also, I've been thinking of adding a couple of L&G trackers to my wifes pension portfolio.

  2. #2
    I really dislike ETFs. They are very complex and the annual reports are impenetrable.

  3. #3
    Interesting... I'm not sure the comparison with CDS's holds water - in that case no one knew that the investments were built on sand, with an ETF you're buying everything and it's very clear what the fund contains.

    His general point is well made though. If people are piling into ETF's now because markets have risen sharply then they may find future returns disappointing or, worse, get wiped out if markets fall significantly because they get beaten in the crush rushing for the exit and end up selling at the bottom. Active funds won't be immune from that of course, but at least with an IT they can use gearing to mop up bargains, as he suggests.

    Against that, I don't think ETF's are for suckers - they're very useful for quickly getting exposure to a particular market or sector at a low cost (the same goes for open-ended active funds where a Tracker or ETF is not available). I think the key is that the term passive is a complete misnomer - you need to invest (or rather trade) in them actively to get the benefits. For less experienced investors or if you want to buy and forget then MNKS is a much better bet in my view - and as the article points out it is reasonably priced (0.59%).

    Disclosure - I hold MNKS.

  4. #4
    Remember the fund is surrounded by 'authorised participants', who provide the liquidity, by creating and redeeming ETF shares to satisfy investor's fluctuating needs, by buying or selling the underlying holdings.
    So effectively an ETF is an open ended fund like Unit Trusts/Mutual Funds.

    The sheer size of the ETFs now marketed means that in the event of a serious Stock slump should ETF investors suddenly flee for the exit en masse, the 'authorised participants' would be working overtime to offload the underlying shares onto the market at whatever price could be realised. Remember the Real Estate UT/Mutual Fund 'gating', where the underlying investment were not liquid. But that illiquidity should not happen if the ETFs are purely holding liquid Stocks.
    But this scene is no different to UTs/Mutual Funds of old.

    Presumably a question we could ask is whether ETF investors are a more nervous and perhaps inexperienced type of investor than others?

    Should such a distressed scenario happen, a value investor would presumably then be able to step in and pick up ETFs at distressed prices?
    Increased Volatility = Good?

  5. #5
    In the doomsday scenario you envisage I wouldn't dream of buying the ETFs at distressed prices.

    I would be filling my boots with the underlying real stakeholdings. As I have always done. And profitably too.

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