One More Thing on Those ETFs...

We can't find a link to this online, but page R8 of yesterday's Journal featured a quiz on exchange-traded funds. The questions and answers seemed fair enough to us. But we can't let the introduction to the quiz pass without noting a ridiculous error. Here's how Andrew Blackman opens his short intro:

Wall Street loves hot investments. One year it's junk bonds, the next it's real-estate investment trusts, another year it's commodities. This year's "it" investment? Exchange-traded funds.

Alert readers will notice the problem with this sloppy comparison right away. Junk bonds? REITs? Commodities? What do they all have in common? They're asset classes. ETFs? They're aren't an asset class at all; they're simply a (relatively) new way to invest in various asset classes. In and of themselves, ETFs per se simply aren't subject to the same kind of excessive (or depressed) valuations that affect asset classes such as those Blackman mentions.

The ETFs representing junk, REITs, and commodities? Of course they can get carried away! But any excess there is a function of the asset class, not the investment vehicle.

This is a distinction with a very big difference and it's one informed investors simply must understand.

Source

Andrew Blackman, "How Well Do You Know...Exchange-Traded Funds?" Wall Street Journal, June 4, 2007 (no link available)