ETFs Part of an Evil Plot

There has been a theme circulating this week in various places of John Bogle dumping all over ETFs as tools of speculation. He has some very specific ideas about why broad based index funds are the only way to go, narrow based funds promote speculation and that investors are doing worse than their funds due to poor, speculative decisions.

There has been sentiment in other corners lately that ETFs are “bad” but they are simply investment products that provide exposure. A given ETF may or may not be the best way to capture a particular market, country, cap size, sector, theme, currency, fad or anything else.

In recent months there has been controversy over the levered and inverse ETF, United States Oil (NYSE: USO) and lately United States Natural Gas (NYSE: UNG). Levered and inverse fund have had image problems because over longer periods of time they do not “do what they are supposed to” because what they are supposed to do is daily not weekly or monthly; image problem. USO and UNG have had a couple of issues. At times the funds have owned a lot of contracts relative to the rest of the market and at certain the funds have been hit very hard by contango (the rolling forward of contracts has been a drag, IE roll yield).

Even these funds are just exposure. If the exposure they provide is not right for you then you should not buy them. Personally I have no need for USO or UNG. I use the ProShares Double Short ETF (NYSE: SDS) as a hedge in client accounts but have never used narrower double short funds and have no interest in using the triple levered funds. The 3X funds have been very popular but not right for me.

The plain equity index ETFs have been very straight forward in being proxies for whatever market they cover. When solar stocks go up a solar ETF will go up, ditto when that segment goes down. Bogle likes to make fun of the HealthShares ETFs and the Walmart Supplier ETF. I wrote about both when they came out and my conclusion was they would be useless and they subsequently closed. That the market voted that these funds were in fact useless doesn’t mean they were bad funds just that they were products for which there was no demand. Anyone willing to take the risk of bringing an ETF to market should be able to do so and then the market will decide. Sounds like capitalism to me.