Why Is the Senate Witch-Hunting ETFs?

ETFs have given investors many significant advantages

     

A History of Copycat Complaints

For those of us who still remember history, similar complaints of market distortions were lodged against futures and program trading when they were blamed for the root cause of the 1987 stock market crash. While this remains the most popular explanation of the ’87 crash, is it the most accurate? To avoid looking foolish, perceptive Wall Street historians and economists have backed away from the previously dogmatic arguments that blamed one particular product, system or event for the massive meltdown.

John Bogle, Founder of the Vanguard Group, is another individual who has bum-wrapped ETFs at every opportunity.

I have deep respect for Bogle and he’s been a guest on my weekly radio program, the Index Investing Show, multiple times. Bogle is 100% right about everything he says about the self-serving financial services industry, minus his spurious arguments against ETFs.

Contrary to Bogle’s assertions, brisk ETF trading volume is good for ETF shareholders. It creates tighter bid/ask spreads, greater liquidity, and has no negative effects on buy-and-hold ETF investors. Also, the same long-term investing principles that Bogle advocates can and are being used with ETFs. Look no further than Vanguard ETFs, which continue to vacuum in record assets. In 2010, the company led its peers with net ETF cash flows of $35.4 billion. What kind of company would Vanguard be today had it taken Bogle’s advice to not offer ETFs alongside mutual funds? We can only imagine.

The undeniable truth is that ETFs have introduced many significant advantages for investors, including lower expense ratios, intraday liquidity, tighter bid/ask spreads, better tax efficiency and multiple hedging strategies. “As a retail investor, I wouldn’t want to be in a mutual fund,” admitted Harold Bradley of the Ewing Marion Kaufmann Foundation in his Senate testimony. Interestingly, Bradley is another ETF detractor.

Barking Up the Wrong Tree

It’s disingenuous for the Senate and other regulatory bodies to be focusing their attention on heavily regulated ETFs while simultaneously turning a blind eye to other areas of the financial services industry that remain — unlike ETFs — largely unregulated.

The opaque $2 trillion hedge fund industry is a perfect example of supreme regulatory incompetence. Despite all the tough talk, hedge funds continue to run loose, doing and saying just about anything they’d like. It’s akin to the free-love era of the 1960s.

Did you know that the Securities and Exchange Commission just eased hedge fund filing requirements? The SEC is “reducing the number of large firms that have to file quarterly and exempting small firms,” according to a Wall Street Journal report. Regulators are perfecting their mistakes.

Conclusion

Although the $1 trillion ETP marketplace has become a cluttered cesspool, this unfortunate phenomenon is hardly exclusive to ETFs and is readily visible in the hedge fund and mutual fund markets, where the trend was started. Likewise, it’s completely accurate to say that ETFs have taken a radical departure from their original roots to traditional index investing, but that doesn’t diminish the valuable role ETFs play in portfolio management, nor does it negate their overwhelming benefits.

Lastly, if ETFs are such an immediate threat to the financial system and if they’re the true culprit behind the stock market’s latest volatility bout, how come Senator Mike Crapo, R-Idaho — the investigation team’s lead dog — didn’t show up to the ETF Senate hearing?

This article is brought to you by ETFguide.com. ETFguide is the information leader on exchange-traded funds because of its vendor-neutral approach and its progressive reporting style. Unique features include an ETF bookstore, a monthly email newsletter and subscription-based ETF portfolios.

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Article printed from InvestorPlace Media, http://investorplace.com/investorpolitics/senate-exchange-traded-fund-etf-hearing/.

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