ETFs can be safe, if you do your homework
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Sign of the times: Financial bloggers ponder whether shortsellers could cause the collapse of an increasingly popular investment vehicle, sparking an Internet debate over whether such a calamity could occur and who would be left holding the bag.
The bloggers write that the investment they have serious concerns about -- exchange-traded funds -- accounted for about 70 percent of the cancelled trades during the May 6 Flash Crash when market indexes plunged about 5 percent in a matter of minutes.
One of the bloggers, Andrew Bogan, is a Boston equity fund manager and holds a Ph.D. in biophysics. Another, Elizabeth C. Bogan, also holds a Ph.D. and lectures on economics at Princeton University.
In short, these are not uneducated people.
Despite their credentials, their hypothesis was quickly dismissed by Morningstar and others who contend that, for all their education, the Bogans and their co-author, Brendan Connor, just don't understand ETFs or the safeguards in place to prevent such a calamity. (Those interested in what three had to say can find their article by clicking on the White Papers link at boganassociates.com.)
Whether their critics are right or wrong, here's a more fundamental question: If it's possible that experts do not understand ETFs, how much do retail investors who have poured billions into them in recent years know?
"There's such a learning curve with ETFs, just as there was with mutual funds 40 or 50 years ago," said David B. Root Jr., of D.B. Root & Co., Downtown.
ETFs have become an increasingly popular, low-cost choice for investors seeking flexibility when investing in a basket of stocks or other assets.
Unlike mutual funds, exchange-traded funds can be traded throughout the day. On days when investors head for the exits at the same time, ETF investors stand a chance of getting out before at least some of the herd. Mutual fund investors can unload only after the market closes, when a fund's closing price is determined.
First Published October 10, 2010 12:00 am
