Exchange-traded funds (ETFs) are the defining investment vehicle of the times, the perfect vehicle for expressing post-Lehman Brothers angst about the troubles of the world, from the debt crisis in Europe to the slowdown in China and the fiscal and economic challenges in the U.S.
In an era when sentiment about global events often takes precedence over the fundamental performance of individual companies, ETFs have soared in popularity because they allow hedge fund managers and other institutional investors to trade in and out of entire markets in an instant. Does the risk level in Europe appear to be on the rise today? You can use an ETF to instantly sell assets in emerging market equities—or all equities, for that matter. Do you want to seek a safe haven in gold? There’s an ETF for that, too. In fact, there are more than 1,000 of them, pegged to almost every index and market sector of significance, from equities to commodities, currencies, bonds and credit.
Unlike mutual funds, which can only be traded at the end of the day, ETFs can be traded on an exchange, all day long, just like stocks. Their fees are lower, too—typically one half to one percent of assets. And the variety of ETFs is seemingly endless. They are typically comprised of the underlying stocks or assets in an index, although sometimes they use derivatives and other synthetic means to replicate those assets. Some use leverage, some don’t. Some allow investors to go long, other ETFs allow investors to go short.....