Why ETFs are a scam

Jon Chevreau · 08-28-2009, 02:14 PM

Well, maybe not! Details in my blog just posted:

http://network.nationalpost.com/np/b...re-a-scam.aspx

P.S. In reply to CC's comment on my blog, I do include the editor's rebuttal at Seeking Alpha.

DrStan · 08-28-2009, 03:34 PM

Cute title, the equivalent of the classic "SEX!!! Now that I have your attention..."

If ETFs are a "scam", then most managed funds with their bloated expense ratios that support huge bureaucraties, fancy offices and steak dinners for their managers should be called an "über-scam".

ETFs are good for broad market cap, fixed income or sector exposure. They are an excellent tool for the medium-sized portfolio (somewhere in the $100,000-$200,000 range) because of their low fees and transparency. For a portfolio less than that range, mutual funds with no trading fees are a good choice; if they are worth more, individual securities with 0 annual fees are probably a better choice than ETFs.

People are just trying to make it more complicated than it should be. I believe that ETFs should be used as the basic building blocks of a solid portfolio, but that still leaves some room for managed money and individual stocks/bonds for the more sophisticated or intrepid investor.

Do I believe the average Joe would do better with a balanced ETF portfolio (say, XIU/XIC, XSP, XIN and XBB/XCB) than with a mishmash of expensive funds? Yes.

As a portfolio grows, however, I believe ETFs should gradually be sold off and replaced with individual stocks/bonds, in order to completely eliminate annual expense ratios. This is what I will start to do within a year or two.

Steve19 · 08-28-2009, 04:33 PM

DrStan,

How many individuals stocks (after slowly liquidating your ETF's) do you plan on holding? More than one in each sector?

CanadianCapitalist · 08-28-2009, 05:41 PM

Quote:

Originally Posted by DrStan

Cute title, the equivalent of the classic "SEX!!! Now that I have your attention..."

If ETFs are a "scam", then most managed funds with their bloated expense ratios that support huge bureaucraties, fancy offices and steak dinners for their managers should be called an "über-scam".

I find it especially strange that the author finds Closed-End Funds to be more transparent than ETFs. Huh?

I agree with you. There is shock value in that post but no valuable insight. Mind, there are points he could have raised -- such as the risks involved in securities lending by ETFs.

DrStan · 08-28-2009, 09:22 PM

Quote:

Originally Posted by Steve19

DrStan,

How many individuals stocks (after slowly liquidating your ETF's) do you plan on holding? More than one in each sector?

Ideally, something like 5 or 6 of the top 15 holdings of any ETF I decide to sell. This will require some stock selection, and perhaps some market timing.

Here's an example. I hold about $40K of XDV (iShares Dividend Fund) in my non-registered account and I have $10K in cash right now. XDV has 30 holdings and it costs me $200 a year in MER (0.50%). I believe that I will be able to somewhat replicate its returns by selecting five or six of its holdings and owning them directly, with no further costs (something like NatBank; BMO; TD, Manitoba Tel; TMX and Sun Life) in lieu of the ETF. This allows for a bit of stock selection, ie. eliminating the index components I don't like.

I actually considered buying more XDV with my $10K in cash, but now I'm looking at two direct purchases of $5000 of its index components. $10K of XDV costs $50 a year in MER. These two trades would cost $20, which means that the cost would be offset in less than six months. It certainly is tempting, especially considering I have about a 30 year time horizon for any investment, plenty of time to rebalance and switch things around.

Caveats:
-I won't replicate the results of the ETF perfectly, and there could be significant variations.
-Yes, I could get burned if a couple of the holdings go down in flames (less downside protection than a diversified ETF).

Preet · 08-28-2009, 11:05 PM

Quote:

Originally Posted by CanadianCapitalist

Mind, there are points he could have raised -- such as the risks involved in securities lending by ETFs.

Worth nothing that as of May 2001, mutual funds were allowed to engage in securities lending (and do), as well as repurchase and reverse repurchasing. So securities lending is not just confined to ETFs.

Jon Chevreau · 09-03-2009, 01:09 PM

A version of the blog about ETFs ran this week in various Canwest dailies under the headline: Don't write off ETFs but tread carefully.

http://www.thestarphoenix.com/busine...785/story.html

Doug · 09-06-2009, 06:58 AM

I'd like to make some comments on Jonathan Chevreau's portfolio. He, like myself, has money invested in ETFs. I agree with him that if your portfolio is large enough, one can buy government bonds. I've tried this in practice, and it has one limitation. If you're in the accumulation phase, it's not straightforward to add bonds to your ladder. Also, if one requires income from one's portfolio, I agree with owning high dividend blue chip stocks directly. This applies often to retirees. I also agree that for ETFs that have a small number of stocks in them, such as the iShares REIT ETF, one can make a case for direct ownership. Direct ownership will take more time though.

However, I am a little puzzled about his ownership of actively managed mutual funds in small caps, global stocks and precious metals.

08-28-2009, 02:14 PM	#1
Jon Chevreau Senior Member Join Date: Apr 2009 Location: Long Branch, Ont. Posts: 203	Why ETFs are a scam Well, maybe not! Details in my blog just posted: http://network.nationalpost.com/np/b...re-a-scam.aspx P.S. In reply to CC's comment on my blog, I do include the editor's rebuttal at Seeking Alpha. Last edited by Jon Chevreau; 08-28-2009 at 03:10 PM. Reason: Added PS

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08-28-2009, 03:34 PM	#2
DrStan Member Join Date: Apr 2009 Posts: 99	Cute title, the equivalent of the classic "SEX!!! Now that I have your attention..." If ETFs are a "scam", then most managed funds with their bloated expense ratios that support huge bureaucraties, fancy offices and steak dinners for their managers should be called an "über-scam". ETFs are good for broad market cap, fixed income or sector exposure. They are an excellent tool for the medium-sized portfolio (somewhere in the $100,000-$200,000 range) because of their low fees and transparency. For a portfolio less than that range, mutual funds with no trading fees are a good choice; if they are worth more, individual securities with 0 annual fees are probably a better choice than ETFs. People are just trying to make it more complicated than it should be. I believe that ETFs should be used as the basic building blocks of a solid portfolio, but that still leaves some room for managed money and individual stocks/bonds for the more sophisticated or intrepid investor. Do I believe the average Joe would do better with a balanced ETF portfolio (say, XIU/XIC, XSP, XIN and XBB/XCB) than with a mishmash of expensive funds? Yes. As a portfolio grows, however, I believe ETFs should gradually be sold off and replaced with individual stocks/bonds, in order to completely eliminate annual expense ratios. This is what I will start to do within a year or two.

08-28-2009, 04:33 PM	#3
Steve19 Member Join Date: Jun 2009 Posts: 43	DrStan, How many individuals stocks (after slowly liquidating your ETF's) do you plan on holding? More than one in each sector?

09-03-2009, 01:09 PM	#7
Jon Chevreau Senior Member Join Date: Apr 2009 Location: Long Branch, Ont. Posts: 203	A version of the blog about ETFs ran this week in various Canwest dailies under the headline: Don't write off ETFs but tread carefully. http://www.thestarphoenix.com/busine...785/story.html

09-06-2009, 06:58 AM	#8
Doug Junior Member Join Date: May 2009 Posts: 10	I'd like to make some comments on Jonathan Chevreau's portfolio. He, like myself, has money invested in ETFs. I agree with him that if your portfolio is large enough, one can buy government bonds. I've tried this in practice, and it has one limitation. If you're in the accumulation phase, it's not straightforward to add bonds to your ladder. Also, if one requires income from one's portfolio, I agree with owning high dividend blue chip stocks directly. This applies often to retirees. I also agree that for ETFs that have a small number of stocks in them, such as the iShares REIT ETF, one can make a case for direct ownership. Direct ownership will take more time though. However, I am a little puzzled about his ownership of actively managed mutual funds in small caps, global stocks and precious metals.