Careful with ETFs

Pfäffikon SZ, Switzerland – Passive investing has a multitude of supporters. It is cheap at first sight, and the investor ostensibly does not have to think. One buys an ETF or tracker, and that is it, is the consensus. Nevertheless, also for an ETF applies that buyers should be careful about what they buy. This is the case with used cars, electronics, and vacuum cleaners; but also with ETFs.

Accountant
It is a known fact that accountants bring along customers files, and consequently proceed with passive investing for their customers after their obtained authorization. They charge a fee of 1% –which seems cheap– until the customer finds out that the former auditor is no investor. This is one thing, but it becomes more poignant when the chosen ETF does not fulfill the promised targets.

Success
The market of ETF investing is a global success. It is a logical consequence that all participants in the financial industry want to get their share of this phenomenon. ETFs are the Aldi, Lidl or Denner of the investment world. Nevertheless, the world of ETFs harbors big hypodermic risks. A good example is the FTSE Vietnam ETF (London Stock Exchange: XFVT). Communist Vietnam is a rising star in the investment world and is for many investors an attractive alternative to China. As a result, the Vietnam stock exchange is doing fine. However, the FTSE Vietnam ETF tracks the market in not one way. It looks like that the weighting of the different stocks within the FTSE Vietnam ETF are never adapted to the index that should be followed. Additionally, the balancing is beaten off balance and may provide acute liquidity problems in the FTSE Vietnam ETF. These are hidden risks never considered by the average ETF investor.

Homework
The passive ETF investor can not avoid doing his homework. The active fund manager relies entirely on its own research, which is a big difference –and advantage– in relation to the passive ETF manager. ETFs offer investors an opportunity to take advantage easily of specific investment themes and strategies. But not every ETF has a good rating. Also, several ETFs behave like a chameleon, because they do not behave as agreed. Before investing in an ETF, it is important to read the prospectus carefully and taking into account the risks. ETF investors should be careful, even though the risks are often swept under the carpet at the sale.

It remains for me to wish you a good weekend.


Jan Dwarshuis is CIO at Thirteen Asset Management AG. Dwarshuis writes his columns in a personal capacity. 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 above mentioned shares and has no intention of doing so in the next 72 hours.