Ladies and gentlemen, the next Big New Thing has arrived. In time for summer, something bright for t...
Ladies and gentlemen, the next Big New Thing has arrived. In time for summer, something bright for the whole family. Be upstanding, show your appreciation, put your hands deep in your pockets and pull out that cash to welcome the biggest, the latest and the most hyped phenomenon, hot from the US of AŠ exchange traded funds.
ETFs, Ladies and Gentlemen. Get to know your Spiders and Leaders. Collect your Opals and Triple-Qs. You can't beat them, so you may as well join them. Here is a index-linked product that combines diversification pluses of funds with all the sport of trading. This is the toy that really gives you big outperformance at lowest cost and little risk.
They have been around forever but we have only just heard of them. They have been available for years but they are now coming to a bourse near you. Why should you go for ETFs right now? Because we are promoting them! Cheap, first time special offers for the uninitiated! And also because they have them in the US - and you know those people really understand how to run a market so fill your bootsŠ and then sit down, because you won't be going anywhere.
Yes, they were designed for professional investors but why let them keep it to themselves? Emerging markets have submerged, corporate bonds are done and dusted, pharma stocks gave us all a headache, and the less said about the TMT implosion the better. You can do it, if you E7 it! Here's a great idea to take our minds off the perils of ever faster moving markets.
Should we fret over where and when exactly exchange traded options first saw the light of day? We must not. Do we care just how fast the market has grown wherever it has started? Not much, except as an indication of liquidity and new proof, if it were needed, of the enduring herd mentality of those professional investors who should know better.
The case for ETFs is that passive managers have outperformed active managers in recent years. Well of course they have, with the indices shooting up. What happens when they head south? ETFs are linked to a designated index, offering diversity and thus risk control. A bit like an index fund, then? And this safety net surely rather depends on the index chosen - many have become much less diversified in recent years.
There is no doubt that costs are much lower for ETFs than actively managed funds. Laudable, but greater fee transparency was a process destined to gather pace anyway as investors got wise to just how much they were handing their managers an a plate. ETFs are tax efficient. Fine, as long as the government extends those concessions.
ETFs can be traded like stocks, and once listed on an exchange, you can get up-the-second prices, allowing you to nip in and out all day, if you wish. Helpful, no doubt, for the institutions, who can park the barrow-loads of dosh coming in until they figure out what to do with it. They will also use these funds as a type of derivative, where they are not permitted to use the real thing.
But have-a-go Retail Man will be in there too, running up his trading costs and getting squeezed first by the bears and then by the bulls, and then by doing nothing at all. UK regulators are already holding their heads at the thought of 5,000 day traders, most with more enthusiasm than experience, playing chicken with the market from their home office PC. Perhaps that new Philippine Love Bug that has grounded whole sections of the web will do us a favour yet.
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