The rise of exchange-traded funds (ETFs) as an investment tool for passive investors has perhaps been one of the most profound financial developments for investors in recent decades.
The ability to buy a diversified portfolio of equities or fixed income securities and hold onto these positions for long-periods of time, accruing rock bottom fees along the way, is a very attractive option for those investors not willing to spend the time and money actively managing a portfolio, or paying someone to do so.
Alongside the rise of conventional ETFs has been an increase in the variety of options available for investors to choose from. A number of leveraged ETFs, ETFs offering derivatives exposure, and a number of ETFs allowing investors to bet on volatility, have risen in recent years.
This past week, a number of volatility linked ETFs were terminated as funds assessed the risk factors related to sky rocketing volatility in a market which has been relatively calm for a long period of time.
Investors using some ETFs to bet against volatility have, in many cases, earned triple digit annual returns in recent years as the trend of lower volatility has allowed for outsized returns. Over the past week, however, a number of such ETFs have been shuttered, resulting in significant short-term losses for many speculators.
In my opinion, ETFs are best utilized for traditional, basic investing in securities which are easy to understand and have reasonable long-term growth rates over time.
I would encourage investors to steer clear of highly levered ETFs or those which take advantage of short-term market fundamentals, as this past trading week has provided reasons for why these investments may not be excellent long-term plays for those looking for capital preservation and growth.
Invest wisely, my friends.
