More Americans are investing in their futures using exchange traded funds, or ETFs. They’re exploding in popularity as investors large and small sign up, seeking tax advantages and flexible trading that mutual funds lack. The industry now has $2.1 trillion in assets, on track to hit $5 trillion in 2020, according to research and consulting firm ETFGI.
As these rivers of money flood in, regulators and market pros worry about how much the pipes can handle. This came to a head during last Monday’s market turmoil, when pricing went haywire for a number of ETFs and mutual funds.
“ETFs are growing really, really fast, and perhaps the technological infrastructure is not growing as fast,” says Seddik Meziani, a finance professor at Montclair State University in New Jersey, who also consults and writes about ETFs.
The ETF industry stands behind its products, preferring to view last week’s issues as more of larger market problem rather than something specific to ETFs, according to an Investment Company Institute representative.
Like any investment choice, ETFs have pros and cons, risks and rewards. Flexible trading cuts both ways. It’s easier to make a smart trade, but also to stumble into a stupid one. ETFs are relatively new and trendy, but age-old investment advice still applies.
“Innovation is good, but it is important that you understand the nuances of a product before you go and buy it,” says Deborah Fuhr, managing partner of ETFGI.