Cautionary Notes On the ETF Boom

While exchange traded funds have proliferated in the past year, some insiders feel this has gone from ETF evolution to ETF pollution. If surging stocks take a rest, some of the specialty ETFs may not have a future.

John Spence of The Wall Street Journal reports that advisors and analysts have singled out a few types of ETFs to be wary of. Those with smaller coffers (less than $50 million), thin trading volume, funds tracking similar areas of the market already dominated by others and far-reaching or thematic highly specific ETFs. The surge of ETFs, on the other hand, is also proof of a strong and profitable ETF products.

Another cautionary note from InvestmentNews: ETF assets are at $422.5 billion, a 40.4% increase, and they are fully accepted by investors. The article likens ETFs to power tools: When used correctly, they are incredibly useful but they can be dangerous when misused.

Broad-based ETFs provide tax efficiency and cheap diversification for long-term investors. Misinformed investors may increase risk if they use ETFs incorrectly. For instance, they may inadvertently increase their exposure to certain sectors or stocks if they do not examine their already existing stocks in their portfolios. The investor must be fully educated to take advantage of the ETF whirlwind.