Should Investors Consider Structured ETFs?

The rise of the Exchange Traded Fund (ETF) is truly remarkable – investors have long looked for a way to invest in the stock market that is low cost, easy to do, and would track the broader success of the market over time.

The ETF itself provides many of these benefits to investors, with the typical index ETF hitting all three aforementioned criteria for many passive investors.

With the rise of index ETFs has come the rise of sector ETFs, and a range of ETFs covering everything from bonds to real estate to alternative investments.

Bond ETFs have gained significance among investors looking to invest in the market (using an index ETF or combination of sector ETFs), balancing out the risk of equities with the safety bonds provide.

This past week, Vanguard Group Inc. announced it would be adding a new structured ETF product, a bond ETF that tracks other bond ETFs, providing investors with access a range of bond ETFs which have different time horizons (short term, intermediate, and longer-dated bonds), combining such ETFs into one.

The Vanguard Total Corporate Bond ETF is not the first of its kind; many ETFs built on top of other ETFs have become available in recent years, however, the recent announcement of yet another structured ETF has many investors wondering just how leveraged some of these ETFs have become.

After all, buying synthetic products, while often a good way to hedge out risk and manage a portfolio, can provide significant downside to investors who don’t know exactly what’s inside each of the securities they are buying.

As we progress down this road, investors will need to be even more vigilant before buying any synthetic or structured ETF products, consulting financial advisors as necessary.

Invest wisely, my friends.

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