Are ETFs Un-American?

by: Tom Lydon

It looks like Warren Buffett and John Bogle both prefer a traditional index mutual fund over exchange traded funds (ETFs). Although Buffett has nothing against ETFs, he just feels there is less temptation to continuously trade and get into trouble with mutual funds. John Spence reports there is an implication investors try to performance chase much to their own demise. Buffett embraces the idea of investing in index funds and doing so regularly; "people ought to sit back and relax and keep accumulating over time." Buying a regular index fund, and continuing to do so over time will ensure you don't buy at the top nor will you buy at the bottom. He believes when investing in a mutual fund, you're buying into a wonderful industry, American industry.

Does that imply ETFs are un-American? We've heard these rumblings from Mr. Bogle, but I'm a little surprised to see Mr. Buffett sharing similar thoughts. The advantages of ETFs over mutual funds are overwhelming. I'm surprised these distinguished gentlemen think little enough of the average investor. Discouraging investors to stay away from ETFs because they might entice trading or speculative investing is like warning people to stay away from doctors because you might get a needle in the eye. Investors don't need ETFs if they are looking for an investment to shoot themselves in the foot. There are plenty of hyped stocks and over-marketed actively managed mutual funds that would do a much better job.