ETPs Should Be Scrutinized

Michael Santoli took a couple of shots at the ETF industry this weekend referring to fund providers as being opportunistic and making some fun of the many ETPs that track the VIX index one way or another. Opportunistic may or may not be the best word but in general the investment product industry is trying to make money. There is potentially an adversarial relationship between the end user the the product company. I’m not sure it is correct to think of this as good or bad because either way the companies are trying to make money and either way there is the potential adversarial relationship.

The more important thing is knowing these things. There is nothing wrong with coming at the use of investment products with a skeptical eye. For someone who invests from the top down, part of the process is choosing the best way in. Sticking with the VIX, maybe after sifting through the ETPs the option contracts on VIX would actually be better? The ETPs have a lot of moving parts–they are far from plain vanilla but I don’t think anything track VIX can be plain vanilla. I don’t think any of the ETPs are created with the intent to deceive or otherwise harm investors but that does not mean that some levered product tracking an index that is often oversimplified an poorly understood will work, often these things don’t work as investors hope.

This is often about investors not actually understanding the product as anything else but that does not change the fact that we are talking about a product issued by a company looking to make basis points from some portion of your assets.

Also true is that if the Market Vectors Mongolia ETF ever lists then anyone wanting to buy that country must seriously consider the fund as there are very few individual stocks to choose from.

ETPs are simply access. No form of access is perfect. That ETPs are not perfect is not news and should not catch anyone off guard. Successful use of the product means understanding the drawbacks and integrating that understanding into the decision making process versus understanding the drawbacks of other choices you might consider. Personally the totality of the VIX ETP situation leaves me expecting to never use these particular products.

ETPs that are plain vanilla baskets of stocks is something I am comfortable with and so in considering something new for the portfolio I look at any ETF that might be related. If I think a plain vanilla basket of stocks is the best way to go then that is the way I will go, if I think an individual stock is better then I will go that way.

All the while it remains true that the ETF provider wants to collect basis points and they put their interests above that of the fund holders. They probably don’t want to screw their fund holders because then there would be no fundholders and no AUM to collect basis points from but again, this is neither good nor bad, it just is and knowing this should allow for safer navigation with these products.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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