Little-Noticed Qualities of ETFs

Exchange-traded funds are perhaps the fastest-growing investment innovation ever. Assets rolled into them in recent years, and there were some forecasts for a while that they would wipe out traditional mutual funds and other forms of investing. That’s not likely to happen. While ETFs have many good features, there are some negative features and potential traps that many investors haven’t focused on. Some focused on them after they already were hurt by them. Here’s a good article that reviews recent events in the ETF world. It discusses whether PIMCO’s new popular ETF will someday have to close to new investors (and how to do it), whether the ETF is better than the PIMCO Total Return mutual fund, how investors were hurt recently in a few other ETFs, and more.

Taken alone, these events signify little. Taken together, you can infer that the ETF structure, as currently concieved, could run into operational hiccups when an active strategy get too big for its britches. ETFs don’t have the more permanent capital of a CEF. Nor can they easily reject new funds.

“It’s not clear what the endgame is for a successful active ETF,” says Joel Dickson, ETF strategist at The Vanguard Group, which does not currently offer any active ETFs.