How Investors Can Be Harmed by Exchange Traded Funds Essay

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Exchange Traded Funds offer market participants with a low-cost alternative to mutual funds and other portfolio management tools. Exchange Traded Funds are primarily used by investors to gain exposer to a particular industry, market, or product category. Funds can range from the highly popular S&P index offered by Vanguard to the more esoteric funds such as the 3x Leverage Dow Funds. Generally speaking, ETFs can lower investor risk by providing then with a security that is diversified such as the Nasdaq ETF or the S&P 500 ETFs. Here investor hold a subset of American business and benefit in proportion to their respective index’s performance over time.However, of late, investors are using ETF not as an investment vehicle but as a gambling or speculative investment. Here, the risk is much higher as many investors do not take the time to read the prospectus to properly ascertain what they are holding. In addition, many of these new, more esoteric ETFs come with higher fees which ultimately can lower perspective returns for long-term oriented investors. This highly speculative investments have much higher risk as they are used primarily as mechanism to gamble. As a result, investors are not concerned with the underlying intrinsic value of the holdings, but are instead focused almost exclusively on price movement.

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This in turn, fuels bubbles as…

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…votes are not cast in the best interest of the shareholders in which they represent. Aspects such as board or director seats, executive compensation, and other initiatives can cause ethical complications as it relates to ETF investing. To become more transparent, ETF’s should further disclose their voting records as it relates to shareholder proposals. As it relates to fees, ETFs should also provide disclosure of fees related to taxes from securities sold throughout the year, transactions costs, commission costs and other elements broken out separately from the expense ratio. This allows investors to better determine if the trading conducted by certain ETF managers has led to higher or lower returns for….....

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"How Investors Can Be Harmed By Exchange Traded Funds" (2021, April 27) Retrieved July 1, 2025, from
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