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Sunday, 18 December 2016

ETFs must stay simple, safe and cheap

ETFs must stay simple, safe and cheap:
"In only one part of the economy — finance — is innovation to be distrusted on principle. Paul Volcker said that the only worthwhile financial innovation during his career was the ATM. He has a point: the finance industry will take any good idea and push it until it cracks. Credit derivatives are only the most recent example.

Exchange traded funds deserve even more than default scepticism. In barely a quarter of a century, they have hoovered up more than $3tn in assets, and now account for a huge chunk of stock trading. The sceptic’s charge sheet: they were largely the invention of stock exchanges that had their own reasons to pump up revenues. They have provided work for exchanges, and for the brokers and investment bankers who keep them from trading at a discount.

All the classic sins are there. ETFs are growing needlessly overcomplicated. They are also looking for ways to reintroduce higher charges. As low costs were always a critical advantage, this is hard to forgive. The extraordinary turnover in ETFs — many times that of the largest common stocks — makes clear that salesmen are pushing clients into pointless trading. Their structure allows for trading minute by minute, unlike the mutual funds they are supplanting, encouraging short-termism just when the world is crying out for long-termism. The swift moves between sectors and top down approach that they permit have changed the pattern of equity markets, with stocks staying unnaturally correlated for long periods and then violently correcting. This helps no one."

'via Blog this'