ETF News: Straying From The Index

Motley Fool had an interesting observation on ETFs, one that I have touched on before. New ETFs are being brought to the market as fast as regulatory approvals can be obtained.

It’s been my philosophy to let each ETF accumulate about 1 year’s worth of price data before I would even consider it. The reason is that I personally like to be able to identify a trend so I can determine whether this ETF is going up, down or sideways.

However, just because you have 1 year of data doesn’t mean that it’s time to jump in. Many new ETFs are covering a tiny market segment, which is of not necessarily of use to most mainstream investors.

The article “ETFs Derailed” brings up another important point about the (ridiculous) segmentation of ETFs. It cites examples that in obscure areas of the market, like oil, ETFs can bring about a wide divergence from their stated benchmarks. In other words, you can’t be really sure what you’re buying and how closely you are following a stated index.

There is no problem with main stream ETFS tracking their indexes, such as SPY, QQQQ and DIA, among many others. But with small esoteric ETFs, this apparently can’t be guaranteed.

As always, buyers beware!

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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