The exchange traded fund or, more commonly known as the ETF, is the newest, hottest product from the financial services industry. Unfortunately, like many good ideas. The exchange traded fund started out as a good idea and then got co-opted by the large greedy financial machines. The good idea was to create a collection of stocks, which were not traded inside the fund, and make a fund that had a low-cost, but could then be traded like a stock. This solved a couple of problems. It eliminated the active management so common in mutual funds and lowered the fee of the fund. It also allowed for instant trading, the exchange traded fund is valued, minute by minute, where a mutual fund is valued at the end of the day.

So where did the idea of the exchange traded fund go bad? The first problem is that the funds themselves are traded like stocks, so a product that was originally designed for discipline and low-cost is now being used for hyper active trading and portfolios are like soap, the more they are handled, the smaller they get. Another problem is that the industry is designing the product for what the consumer wants to buy instead of designing products for what the consumer should own. In fact there are very few products available that the consumer should own and there are entire segments of the market missing in the exchange traded fund world. To use a food analogy that stays with the theme of my book, titled The Nest a Cookbook. It’s kind of like selling dessert when you should be buying meat, potatoes and/or vegetables.

Exchange traded funds are now replicating so fast that you would think they were mosquitoes in a swamp, but this replication is sucking the lifeblood out of people’s portfolios. If you owned an ETF, that held the S&P 500, then your ETF could go down in value or up in value even if the underlying stocks didn’t change at all. So this creates a 2nd layer of volatility driven by the fear and greed of the marketplace.

We help our clients take the good of exchange traded funds like a low-costs and the structure of owning a class of stocks and eliminate everything bad about an exchange traded fund like volatility, bad asset classes, bad sectors and rising fees.