I have a big problem with Exchange-Traded Funds (ETFs). As someone who spent more than two decades running a trading desk for one of the biggest companies on Wall Street, I see a bubble that’s about to burst, a star about to tumble, a poker-player’s flush about to bust.
I base this conviction not just on my Wall Street wiles, but also on the words of my grandmother, who lived to the ripe old age of 99 ½.
Her motto was “everything in moderation”… and the explosion in ETFs over the past decade represents anything but moderation.
Since 2000, the total value of assets in ETFs has skyrocketed to more than $1 trillion!
Just take a look at this chart:
Some ETFs Just Don’t Work…
The United States Oil Fund (USO) was introduced as a vehicle to help investors track the price of crude oil. When it started trading, the ETF had a 1:1 price relationship with crude oil traded on the futures exchange in New York. Its administrative cost – also known as the “expense ratio” – was 0.45%.Today, with the active month crude oil contract trading around $106 a barrel, you’d think this ETF must also be trading around the $106 mark, right?
Sorry, not the case. This ETF was trading at significantly less than half the value of the crude contract. A quick check reveals that USO is now trading at around $40!
So what happened?
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