There's No Such Thing as an ETF Bubble

The guest author, in trying to support his case that ETFs could be a bubble, notes that his 73-year-old mother-in-law doesn't need an ETF that "tracks the Chinese yuan." This line of thinking comes up frequently and is thoroughly ludicrous. Following his logic, anything that isn't suitable for his mother-in-law shouldn't exist. Investors, pros and individuals alike, have been blowing up their portfolios for years, long before ETFs began to proliferate. If every ETF closed tomorrow, people could still get into plenty of trouble buying out-of-the-money options to speculate on an earnings release or by loading up on a stock like Dendreon(DNDN) right before Food and Drug Administration news is due to hit. Greed and betting far too much on a specific outcome weren't invented in 1993 when the first U.S. ETF was listed.

There are plenty of ETFs that provide a means for aggressive speculation, and they have an audience, to be sure. Direxion Funds, the provider known for offering long and short funds that offer 300% of the daily exposure for the indexes they track, has almost $6 billion in assets under management. There's no doubt that some folks won't understand the dynamics of those products. This would be no different than with options or lottery-ticket stocks.

Investment products aren't greed-causing or speculative in and of themselves. They may create the means with which to express those behaviors. But remember that options can be used in defensive hedging strategies, and bonds, considered the safest of securities, can be used in speculative trading. The opinion expressed from the YieldPig blog is better pointed at human behavior, not an investment product.

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