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What's Next for ETFs

Financial advisors debate where the product is headed and what investors should keep in mind.

Many advisors see the continuous rollout of new exchange-traded funds and illiquidity as possible stumbling blocks for the product in the future, yet they generally remain upbeat about its prospects.

“We’ve seen a proliferation of ETFs that have since consolidated or have shut down because they don't have sufficient assets,” says Mark Butterworth, president of Butterworth Financial in Tulsa, Oklahoma.

He and about 110 other advisors participated in a recent online poll conducted by ThinkAdvisor.com and sponsored by OppenheimerFunds.

“We are getting to a point that we are slicing and dicing the market into far too many sectors, and this has the potential of watered-down results,” explains Alan Myers, president and senior portfolio manager of Aerie Capital Management in Baltimore. 

“In other words, a successful strategy could lead to a bubble that would lead to the demise of the strategy,” Myers says.

Rob Shedd, a financial advisor with Addison Avenue Investment Services in Fort Collins, Colorado, adds that using ETFs for index investing has become today's “fad.”

“It's not hard to pick winners right now, and those strategies are working for most investors," explains Shedd.

"The test always comes when we have a downturn, a 5% plus or minus pullback. That's when the active managers earn their pay, weeding out the losers and hanging onto the winners,” he states.

Rob Hauf, an advisor with Securities Service Network Advisory in Whitefish, Montana, agrees.

“People don't understand passive management and the risk involved with it,” says Hauf. “They understand cost, but wait until all hell breaks loose, and it will.”

Mack Courter, principal of Courter Financial LLC in Bellefonte Pennsylvania, also is concerned with the ETF illiquidity and volatility during a flash crash. Like many other advisors, though, he still views ETFs as “the best investment vehicle there is.”

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