Why are ETFs growing?
Exchange Traded Funds are mutual funds that trade on an exchange. The concept has been around for decades. But in the past, what are now called “closed end” mutual funds almost always traded at a significant discount to the market value of their underlying holdings. This limited their appeal.
Open-ended ETFs began to appear a decade ago, and the concept really took off in the aftermath of the tech bubble. These funds closely track their underlying holdings because institutional investors can create or redeem new shares by delivering or receiving the underlying stocks. That keeps any discount to a minimum.
Investors have flocked to the investment vehicle. In October almost $700 billion had been invested in over 1500 US-based ETFs; a significant percentage of the $5 trillion mutual fund industry. Why have they done this?
Well, it’s easy to buy and sell them. Once you have a brokerage account you can purchase or sell the funds without disclosing your income, age, or favorite sports team. There are other advantages, but I think the “ease-factor” is the most important. Why do people buy ETFs? Because they can!
So the ETF industry is going to grow. Like any boom-town, this neighborhood will soon be populated by upstanding citizens, fringe weirdoes, and unsavory low-lifes. As with any investment, buyers need to ask questions and know what they’re getting. Because the Sherriff is a long ride away.
Douglas R. Tengdin, CFA
Chief Investment Officer
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