Much has been said about exchange-traded funds, a booming part of the investing world.
These funds, which mostly track key benchmarks like the S&P 500 SPX, +0.57% , have attracted $5 trillion in investor money globally, topping hedge funds’ assets under management.
But ETFs remain misunderstood, says Deborah Fuhr, co-founder and managing partner for research firm ETFGI.
“I think the top challenge for the ETF industry, ironically, is still education. When I started covering ETFs in ’97, I thought I would have a job for two years, and everyone would know what they were, and we’d move on,” the London-based Fuhr told MarketWatch in a recent interview.
More education is needed in large part because ETFs are providing exposure to a growing range of asset classes, according to Fuhr, who has been called “an ETF pioneer in Europe” by information provider ETF.com. The indexes that ETFs track are evolving as well, she said.
“People need to make sure that they understand the benchmarks,” she said. “Do you want something that is market cap-weighted, equal-weighted — some other structure of benchmark? Recently we’ve seen how the mainland Chinese market is opening up. So what does it mean to invest in China A-shares?”
See: Here’s what investors need to know as China A-shares join MSCI indexes
The industry’s offerings often get complicated, though the esoteric products generally don’t attract huge amounts of investor money. Credit Suisse CS, +0.53% CSGN, -1.35% drew flak this year for the performance of an exchange-traded product that let traders bet that markets would stay calm. The Swiss bank’s CEO, Tidjane Thiam, defended the exchange-traded note, stressing that its prospectus said it was a daily trading instrument for sophisticated investors, rather than a long-term holding.
Fuhr made a similar point, suggesting that investors must do their homework.
While most ETFs are “really useful tools” tracking “benchmarks that you know and understand,” not all are like that, she said. “We do have other products that are leveraged or inverse or offer exposure to niche segments.”
“But the reality is even those products do what they say they’re going to do, if you read the prospectus. But people often don’t read the prospectus,” she said. “That’s where we’ve seen some problems, where people have thought, ‘Oh, I’ll buy this and expect X.’ If you don’t do your homework, you probably are going to be surprised and disappointed.”
New “thematic” ETFs have flooded the market in recent years, and Fuhr offered a warning on that development. Other analysts have sounded cautious as well, noting that some blockchain ETFs have top holdings that are mostly moved by issues that aren’t related to blockchain. Blockchain is the digital ledger that underpins bitcoin BTCUSD, -1.50% and other cryptocurrencies.
“Whether it’s ROBO or HACK, you need to make sure that you understand what you are buying, because clearly those names don’t really tell you very much,” Fuhr said, referring to a robotics ETF ROBO, +0.63% and a cybersecurity fund HACK, +0.87% . “It is on the investor and financial adviser to make sure they understand the products.”
Check out: Robotics ETFs could see another boost from tax changes
Also read: String of hacks keeps cybersecurity ETFs in focus and in the green
The video below features more comments from Fuhr:
This story was first published on Aug. 28, 2018.
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