Inside Money: ETFs - greatest ever innovation or looming disaster for investors?

The loom band market appears to be in the doldrums with the latest TradeMe auction closing out with no buyer on an $8 reserve. Photo / Thinkstock

I thought it was loom bands but legendary investor, Jack (aka John) Bogle has named exchange-traded funds (ETFs) as "the greatest marketing innovation of the 21st century".

But as Bogle, the godfather of passive investing, told the Financial Times (FT), he doesn't mean that in a good way.

"It is a great marketing device, the ETF," told the FT. "... but it remains to be seen whether it is the greatest investment innovation. I do not believe it is; I think it will hurt returns for investors."

Bogle, who developed the benchmark model for index investing with Vanguard, isn't necessarily talking his own book here.

As the latest BlackRock 'ETP [exchange-traded product] Landscape' report shows, Vanguard is the second-largest ETF manufacturer in the world. (With US$452 billion of assets under management, Vanguard ETF business is only overshadowed by BlackRock's own iShares brand, which reported assets of more than US$1 trillion.)

The apparent discrepancy between Bogle's sceptical view of ETFs and his firm's massive presence in that market can be partly explained away.

"[Vanguard] has a modest portfolio of funds tracking broad asset classes and an investor base that skews towards those of a buy-and-hold mentality," the FT story says.

Bogle's problem is with those other ETFs; the 5,000 or more products that, according to the BlackRock Landscape report, span a dizzying array of asset classes, sub-indices and countries.

Bogle's problem is that ETFs turn his cherished vision of buy-and-hold passive investing into an active game - a fact which the BlackRock report bears out.

"... 2015 began with surging demand for non-US developed markets equities, which gathered $18.2bn. Fixed income added $13.0bn along with $5.2bn for commodities," the BlackRock report says, beside a graphic highlighting 'trending, ongoing and fading' ETP flows.

But the "greatest marketing innovation of the 21st century" has generally failed to spark in New Zealand. The NZX-owned Smartshares is trying to remedy that with its renamed suite of five ETFs and a couple of new ones launched in January targeting the Australian dividend and listed property stocks.

According to the latest market data, Smartshares managed about $500 million, of which just over $90 million is in the two new funds. Smartshares may release more ETFs next year and will hope to fill up the NZ demand gap with its newly-purchased Superlife funds.

To date, Smartshares two new ETFs have been lightly traded, however.

But as Bogle says, ETFs are "fine, I suppose, just so long as you don't trade them".

Meanwhile, the loom band market appears to be in the doldrums with the latest TradeMe auction closing out with no buyer on an $8 reserve.