The most over- and undersold benefits of ETFs

A closer look at some of the most heralded and overlooked features of this investment wrapper.

Ben Johnson, CFA 4 September, 2018 | 5:00PM

As an investment wrapper, exchange-traded funds have several beneficial characteristics. But I would argue that some have been oversold -- made out to be more significant than they are. Others have been undersold -- not given their due. In both cases, I think there is some mischaracterization of the benefits, missing context, or some combination of the two. Here, I will stand them up and knock them down, one by one.

Oversold: ETFs' liquidity -- the ability to trade them just like stocks, during normal market hours. I think liquidity is oversold for two reasons. First, I think this framing is overly narrow. Second, I think that intraday liquidity could tempt investors to trade more often.

Undersold: ETFs' flexibility. Investors can go long ETF shares, sell them short, buy them on margin, buy and sell options on them, lend them to others to collect a fee, and more. This versatility can attract a very large and diverse investor base that uses these funds in meaningfully different ways. The diversity of ETFs' base of investors and their use cases is the foundation of healthy liquidity in ETF shares, which benefits all investors in the fund.

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About Author

Ben Johnson, CFA

Ben Johnson, CFA  Ben Johnson, CFA, is director of global ETF research for Morningstar and editor of Morningstar ETFInvestor, a monthly newsletter.

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