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.
Know ETFs' Limitations
ETFs are just one tool available to investors. Others include stocks, closed-end funds, OEFs, structured products and unit investment trusts. As much as I believe ETFs help empower investors to get better results, they will not always be the best possible tool to capture specific parts of the market.
I mean that geographically in particular. While there are several ETFs that give investors broad exposure to regions such as China, Austria and Canada, there are some gaps. For example, Ireland offers a healthy and growing economy with a pro-business government, and is one of the wealthiest countries in Europe per capita. Yet there is no ETF that U.S. investors can easily access. There is a CEF,
The New Ireland Fund
, and there are several
-listed ADRs. I capture this market for clients with one of the ADRs.
Norway is another important investment destination because it is a huge oil producer. But the only way to gain exposure to this country's economy in the public markets is through a very few ADRs. There are no ETFs, CEFs or even OEFs I can find that isolate Norway.