I remember back in the middle of the last decade when the Exchange Traded Fund (ETF) market was exploding. From 2002 to 2009 the number of ETFs on the market went from 102 to over 1,000. Currently, I believe the number is somewhere around 1,500. The investment variety is amazing.
In general, I find the growth of ETFs a major benefit for professional and individual investors. The diversity has provided a number of pathways to various investments that previously were off-limits or a burden to structure. Exotic investments some might say. Want to investing in the S&P 3x leveraged long? What about short? No problem, multiple ETFs exist to help you.
Within a matter of minutes you can scan industries and sectors and determine themes and strengths. Technology and ETFs are at your side the entire time. It is quite remarkable when you actually ponder the power at your disposal.
With the plethora of ETFs available to all investors, do you even need to bother with individual stocks? It’s an interesting thought. Of course your strategy may dictate one or the other, but does your average investor even need to deal with X, Y, or Z stock? What’s the use? Buying individual stocks opens you up to a significant amount of risk, whether you will admit to it or not. Look at Chipotle. Once a darling, now it’s as if it became Brer Rabbit and can’t get free from the tar baby. How hard is it to control e-coli? Very hard, apparently. The point is that odd things happen with businesses. Whether darlings and duds, the impact can derail any momentum.
Taking ownership of a industry via ETF is a different story. You own the basket and you have some form of instant diversification. If you’re more aggressive, you’re likely to find a leveraged ETF that speaks to your investment theme.
We’re to the point where many investors would classify themselves as ETF investors rather than stock investors. Maybe this doesn’t seem odd, but if we were sitting around and it was 2005 the idea would be quite strange.
For the individual investor in particular, the ETF investing concept is great in many ways. Do you know how many people get hung up management trust issues, financial statements and a plethora of other indicators? I’ve sat with fiscal professionals that do not invest and they have a million different questions they would want answered before they would invest in a company. Hearing the questions is quite interesting because most, if not all, are valid questions. Yet, to hear the volume of questions convinces me that for them to invest individually, they would need to quit their job. The level of certainly needed and hands-on approach is not feasible for a slice of your evening.
The problem posed above is partially solved by what ETFs present. Instant diversification and a wide-base exposure to a particular area of the economy.
In a world where the financial service sector has brought about some real BS gimmicks that do nothing, except charge more for management fees and reduce an investors overall return, the growth of ETFs have been a breakthrough in investment management. Take a moment to appreciate a change for the positive.