The whole idea of passive investing – investors tracking the market by owning index funds – has been turned on its head by exchange-traded funds (ETFs).
Most ETFs are index funds, but the investors in them have become anything but passive. Active ETF trading has become the new passive investing, which makes ETFs potential financial weapons of mass destruction.
I’ve been warning my readers about the dangers of ETFs for years. ETFs can lead to a crash when so-called passive investors turn active, as they have been doing lately.
Barron’s front-page story on Monday morning about John C. Bogle, the father of passive investing through mutual funds, got me riled up. It’s a good summation of some of the problems with index ETFs, as Bogle sees it, but it doesn’t go into the weeds at all.