As terrific as exchange-traded funds are, they have their limits. Investors who are tempted to rely solely on this type of investment product need to know the pitfalls of that approach, and to steer clear of a new type of product that encourages it.
Now, I have been a big fan of ETFs since their inception. They clearly offer do-it-yourself investors a chance to be better portfolio managers, and offer professional investors a chance to manage pools of capital with more efficiency. As these investment tools catch on, expect more innovation from the ETF providers, which will result in more opportunities for investors to reach their financial goals. I have unyielding faith in the benefits of ETFs; I use some in my practice and own some personally.
But ETFs are not a panacea.
In the last couple of years, a lot of new ETFs have been created, some innovative and some not. There has also been a proliferation of products that cater to ETF investors such as open-end funds comprised of ETFs, all-ETF portfolios offered by both the sell side and the buy side, and newsletters devoted to ETFs. Investors must choose carefully; to help them do so, I'd like to point out some ETF blind spots and review a new set of products, managed all-ETF portfolios, that sound great but actually just compound the disadvantages of ETF investing.