ETFs under fire
Pfäffikon SZ, Switzerland – The ETF is an investment product of unprecedented popularity. ETF stands for ‘Exchange Traded Funds’ and is also referred to as an index tracker. Investing in an ETF is a simple way to engage in passive investing. The philosophy underlying the ETF is that many investment funds aren’t able to beat a certain index in terms of returns and that you’re better of slavishly following an index. There are enough examples where the ETF holds true to this belief, more so even, when taking certain time periods into account. In addition the costs are low and participation is often accessible and offers ease of trade. Still, I am not a supporter of the ETF because with a sensible investment policy the index ETF will eventually be beaten due to – among other reasons – the factor compounding coming into its own. .
Hype
The hype surrounding index investing will come to an end. This will likely happen when the markets experience a new crash and investors come to the realization that an index offers a false sense of security. For you are also investing in the suckers of the index and they will be brought down mercilessly when the markets enter into a bear market. Moreover I find the low cost pattern deceptive. After all, following an index is child’s play; one doesn’t need help. Incidentally many indices paint a clouded picture, because every year they change like a chameleon. The Dutch AEX index is an illuminating example.
Homework
In the past I have pointed out the possible upcoming problems with the ETFs. Given that there are without doubt many good ETFs, the enormous popularity also attracts less gifted ETFs. Many market participants after all want to profit from the unprecedented success of the ETF. Take note, for instance, of the liquidity of the ETF and its underlying investments. You will likely be surprised. Investing in an ETF is not the same as going shopping at the Aldi or Lidl, yet it is being sold in this manner. Every investment requires diligence and a lot of homework, so to does an ETF.
Pimco ETF under Fire
Coincidence or not, last week it became apparent that none other than Pimco Total return Fund had come under fire by the American Securities and Exchange Commission (SEC). Pimco – the largest bond investor in the world – had already not been doing well recently. The thirty year bull market in bonds is running its last mile and Pimco in particular is feeling it . The bond party is over, even though many investors are not trading as if that’s the case. The outflow at Pimco is impressive and to add insult to injury more problems are on their way regarding the valuation of one of their most popular ETFs; the Pimco Total Return ETF.
First Warning
Pimco is supposedly to have fiddled around in order to hide its meager results. This came to light by a difference in returns between the ETF in comparison to the return of the Total Return Fund. It is too early to draw conclusions but it is apparent that my before mentioned points of attention are slowly becoming reality. More ETFs will follow and financial watchdogs will now – deservedly so – be faster to sink their teeth into the popular ETF. If you have an ETF in your portfolio then you know what to do. After all, a forewarned person is forearmed.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
