At Alpha Omega Investment Advisors, we believe in an active, low risk investment management approach. That said we, we closely follow a large number of investment topics including the pros and cons of ETF or index investing. It is clear that over the last twenty years ETFs have risen in popularity, having grown from $0 at creation (in 1993 with the introduction of SPDRs) to almost $3 trillion invested across multiple asset classes today. For reference, the entire Wilshire 5000 equity index totals about $21 trillion in value. Why this growth? The popularity of ETFs stem from: 1. Lower fees (It is much simpler to create a fund to mirror an index than to research individual investments) and 2. The belief that, after fees, active investors stand no more chance to “beat” the market than an index. We, however, believe that good active managers can and do beat the market over the long run. Additionally, good active managers endeavor to respond to changing risk scenarios in the market.
In addition to these well-covered differences, the New York Times article below addresses the risks associated with the huge size of the ETF market and the possibility of a super-crowded trade and reduced liquidity in a potential market swoon. The article is worth reading for many investors who do not want this extra potential risk.