An Argument in Favor of ETFs

From the Wall Street Journal: ETFs for Investors Who Buy and Hold

Investors are gaining access to a growing number of exchange-traded funds, but financial planners don’t always agree about whether that’s good news for buy-and-hold investors.

Many advisers say the profusion of narrowly focused ETFs runs counter to one of the central ideas of conservative investing: building a simple diversified portfolio with funds that each cover a broad market swath.

“The slicing and dicing that is happening in the ETF arena is totally getting out of hand,” says George Papadopoulos, a fee-only financial planner in Novi, Mich. He notes that there’s an agriculture ETF focused solely on corn futures. These types of funds, Mr. Papadopoulos says, “are not diversified enough, and they are enticing consumers to play the market.”

Dan Goldie, president of Dan Goldie Financial Services LLC, in Menlo Park, Calif., says investors should favor ETFs with “hundreds or thousands of stocks, not narrowed down to just technology or just financials or just gold.”

For example, he says, that might be an ETF that offers exposure to small-cap stocks by tracking the Russell 2000 index.

Still, some advisers say there are plenty of ETFs, including newer ones, that are good building blocks for buy-and-holders. The characteristics to look for, they say, should be the same ones used to shop for index mutual funds: products with broad coverage and low cost.