MarketWatch Column Bashes ETFs (and By Extension)... Mutual Funds

Market Watch columnist Chuck Jaffe has done it... thrown egg in the face of the most popular Wall Street product of the century."... a number of studies", he asserts, "seem to indicate that the 'better' investment vehicle isn't delivering better results."

What kind of blasphemy is this! Not.

It is simply the fairly obvious truth. Although ETFs cost less than conventional Mutual Funds, they are subject to precisely the same flaws... actually, they exacerbate the major mutual fund problems. With ETF non-management, "da mob" of unsophisticated speculators will always push security prices higher and higher until whatever bubble they have created simply bursts.

The "exacerbation" stems from the mad (MPT) science of ETFs themselves, which focuses all decision making on market price performance issues instead of economic and company fundamentals...

MPT is "technical analisis" nirvana: What sectors go up when others go down; which benefit from war, peace, demand for oil, etc... and which don't. Buy the hot sectors and sell the weaker ones floats a lot of boats, but what happens when "macro" forces spread disease among most, if not all, of the sectors...

ETFs (and Mutual Funds) crashed in 2008; Mutual Funds led the crash in 2000, High Quality, S & P Investment Grade, Dividend Paying Companies... kept right on ticking through the dot-com fiasco and fared far better than any "sector" during the financial crisis.

Note that there is no "Investment Grade Value Stock" Sector.

MPT birthed ETFs buy groups of company shares based on their sector membership, with little if any concern for the underlying fundamental quality... and any form of speculation can be labeled a "sector" and included in either a Mutual Fund or ETF 401k investment product menu.

Once again, the "emperor" has convinced its hand selected regulators that a suit of ETF sector indices is all the wide eyed investment public needs to wear... so long as it's properly diversified (and rebalanced periodically).

The mob appeal of both forms of speculation lead to market bubbles, and in most aftermaths, only the fundamentally strong companies (and portfolios) survive. I think this is where Jaffe is going; I'm already there. Wall Street creativity always goes south eventually, as the Wizards move further and further from plain ole stocks and bonds.

With conventional Mutual Funds, "da mob" of unsophisticated speculators will always make "managers" push security prices higher and higher until whatever bubble they have created simply bursts. The managers, ya follow, must keep their portfolios "fully invested" when deposits exceed withdrawals, and must sell, even at major losses, when the panic-stricken throng wants their money back.

As far as I know, only Market Cycle Investment Management takes "da mob" totally out of portfolio decision making, allowing the manager to take profits when prices are much too high and to buy securities when prices are free-falling.

For the complete Chuck Jaffe article: "The Growing Case Against ETFs" 

For another analysis, circa 2011: ishares and ETFs: Speculation to the Third Power