Tags: Brennan | ETFs | Vanguard | worry

Vanguard’s Brennan: A Note of Caution on ETFs

Wednesday, 20 Feb 2013 08:22 AM

By John Morgan

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Jack Brennan, chairman emeritus of mutual fund giant Vanguard, is apparently worried about three things — ETFs, ETFs and ETFs.

Brennan is actually a supporter of exchange-traded funds (ETFs) in general, and oversaw Vanguard’s efforts to add them to its product offerings during his tenure there. But now he detects some potential problems with them.

He is particularly concerned about the rapid growth of ETFs in the marketplace, Investment News reported, as they number over 1,000 today.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

“Products keep coming out, and it’s worrisome,” he said at an IndexUniverse conference last week. “The big challenge for advisers is figuring out what’s innovation and what’s proliferation.”

Brennan said he also had concerns about actively managed ETFs.

“I just don’t get it. The idea of an active ETF sounds like an oxymoron to me. One of the reasons you index is to take manager risk out of the equation.”

Third, Brennan is worried about the threat of more future regulation of ETFs, according to Investment News.

ETFs were initially identified as one of the causes of the 2010 “flash crash,” although later research found they had no impact on it, he noted.

“We don’t need this product to be colored as more worrisome or complex than it really is,” Brennan said.

Joel Dickson, senior investment strategist at Vanguard, said the majority of new ETFs are tracking back-tested indexes that are less than six months old, Investment News reported.

ETFs recently have seen net withdrawals of investor money, The Wall Street Journal reported, suggesting ETF investors may believe a pause or pullback in the stock market is ahead.

Weekly net withdrawals from ETFs, which are often favored by active traders and institutional investors, have also diverged from the cash continuing to flow into mutual funds, which typically draw more individual consumers, The Journal said.

Separately, Bloomberg reported some institutional funds have recently engaged in large withdrawals from junk bond ETFs, and The Journal said some high-profile investors have been unloading their holdings in gold ETFs.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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