Ask anyone what the primary difference between an ETF (exchange traded fund) and a mutual fund is and chances are you'll hear something along the lines of they're just like regular funds except they trade on an exchange and you can buy and sell them anytime, just like a stock.
Sure their costs are low and ETFs offer an array of strategies and styles from which to choose, but the feature that truly sets them apart - and seems to draw the most investors in - is right in the name; they are tradeable.
But for all that popularity and allure, not to mention the disproportionate share of new money that's being invested into ETFs, Wall Street legend John Bogle, founder of The Vanguard Group, says the temptation to trade is their ultimate short-coming.
"The growth has been much more than I would have ever expected," Bogle says of this fast growing, $1.4 trillion dollar industry that still faces "a lot of misunderstanding."
Generally speaking, Bogle says most broad index ETFs are just fine, but he warns investors that individual sector and country funds are probably "too narrow for most." As for leveraged and inverse ETFs, Bogle says this is where the "fruitcakes, nut cases and lunatic fringe" can be found. "There's just no possibility or any realistic way that you're going to win that bet," he says about leveraged ETFs.
And finally, when you factor in the reality that about 75% of ETF assets are held and whipped around by institutions, and therefore subject to high turnover, Bogle says it's not the place for the weak of heart.
"They can play games in ETFs that they can't play elsewhere," he says, specifically pointing to hedging and short-selling, as well as a turnover rate of about 8000% a year for popular funds like the SPDR S&P 500 (SPY).
"That's no way to invest," says this octogenarian creator of the index fund, before reiterating his preference for indexing.