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ETF Specialist

What We Like Most about ETFs

There are many more positives about ETFs than negatives, despite the headlines.

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Adverse market conditions over the past year not only tested the resolve of investors--as they watched their portfolios plummet and then rebound substantially--but also tested the viability of several ETF structures. At the height of the market's volatility, we wrote several articles discussing idiosyncrasies such as how bond ETFs failed to track their indexes, leveraged ETFs produced substantially negative returns due to historic volatility, exchange-traded notes became riskier propositions because of their inherent credit risk, and commodity ETFs gained assets rapidly only to reach their regulatory limits on shares they could issue. The list goes on, but you get my point; it was a rough year. However, ETFs were not the only investment vehicles for which some warts were exposed, and in the vast majority of cases, the structure of ETFs proved to be extremely resilient for such a young product facing an extremely strenuous litmus test.

I'm glad we had a chance to highlight some of the pitfalls that investors should avoid, but I am taking a moment to discuss what we love about ETFs. ETFs have grown rapidly over the last few years, in terms of assets under management, the number of products, and the slate of increasingly complex securities. While we think many of the new strategies reaching the market are intriguing and useful for more sophisticated investors, what we find most compelling are the products that have been around the longest and have attracted the most assets.

Paul Justice does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.