ETF Investing Isn’t Scary

| July 19, 2011 | 0 Comments

Longtime readers know my passion for teaching investors about ETFs (Exchange Traded Funds).

I regularly touch on a variety of ETF topics.  The Dynamic Wealth Report archives are filled with articles about exciting new ETFs, the benefits of investing with them, and even specific ETF investing ideas.

Apparently my job of spreading the word about ETFs is far from over…

According to the Investment Company Institute (ICI), “only 5% of households owning mutual funds also owned ETFs.”  That’s shockingly low…

Just about everyone with a 401k or some other type defined contribution plan invests in mutual funds.  After all, mutual funds are usually your only investing option in a 401k…

And of all the people, with an eye-popping $4.5 trillion invested in a 401k, only a handful of them are investing in ETFs.  But here’s the catch… The ICI also said those who use ETFs tend to be more affluent and sophisticated investors.

I have to ask…

Are ETFs only for affluent and sophisticated investors?  Or, are investors sophisticated and affluent because they use ETFs?  (Just something to think about…)

Either way… the fact that so few people are currently using ETFs is disturbing to me.

And a recent study of the ETF industry by Bank of New York Mellon (BK) and Strategic Insight really touched a nerve with me.  They said the “biggest challenge to ETF growth is… a lack of understanding of ETFs and how the work.”

So, I’m here to pound the table again about ETFs.  But this time I’m going to take a slightly different approach.  I’d like to dispel a few myths plaguing the ETF industry.

You see, just the other day I was listening to the local financial radio station on my way home from the gym.  The supposed “experts” on the air were bad mouthing ETFs.

When I heard them say ETFs were too risky, volatile, and complex for most investors, I nearly yanked my car into oncoming traffic in frustration!

They pointed to last year’s “Flash Crash” as evidence ETFs were risky.  On that horrifying day last May, the Dow lost more than 900 points in a matter of minutes.  Then just as quickly, it recovered the majority of those losses.

During the Flash Crash, many stocks and ETFs momentarily traded at more than 60% away from their value.  Many of the trades were later canceled.  And ETFs represented 70% of the broken trades.

After I calmed down, I looked into what they were saying.  And the truth is ETFs had nothing to do with causing the disruption.  They were simply a victim of high-frequency trading gone haywire.

In fact, ETFs were no different than Proctor and Gamble (PG).  That day one the sturdiest blue chip companies around fell from more than $60 to a low of $39.37 in less than four minutes.

The way I look at it, PG isn’t too risky or volatile because of what happened during the Flash Crash and neither are ETFs.  In fact, making an argument for or against the entire ETF industry based on one day is just plain stupid.

The bottom line is investing in anything comes with a certain amount of risk.  But investing in an ETF isn’t inherently riskier because of the way ETFs work.

So put aside the unfounded fears and jump aboard the ETF bandwagon. After all, the 5% of mutual fund owners who take the ETF plunge tend to be more affluent and sophisticated investors.  And isn’t that why we’re all investing in the first place…

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Category: ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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