Exchange Traded Funds - A New Frontier of Investing?

There are several schools of though regarding different classes of investment vehicles, but proponents of the Efficient Market Hypothesis (EMH) will tell you that it is usually impossible to beat the market over time. Although your fund manager may provide you with good returns, after adjustment for management fees the funds only marginally outperform indexes (the idea that you get what you pay for not much more or less).

The follow up question is usually: "So why am I investing in mutual funds?" and a surprising answer is "You don't have to". There is a popular trend to now start trading in Exchange Traded Funds (ETFs). Similar to mutual funds, ETFs can be composed of a variety of different investment vehicles which base their price movement on different styles or strategies. For instance, there are ETFs which move with US dollar exchange rates, natural gas prices or even industry sectors.

The fundamental idea of an ETF is to package a simple and relatively cheap way to position yourself in a market without having to pay fees and without having to suffer significant liquidity premiums. It also allows you a relatively simple mechanism to package and diversify your investments and can provide you with diversity or access to different market segments.

Although a fairly "lassiez faire" investment style, it is possible to put together a portfolio that contains a few ETFs that provide the appropriate diversification for your investment time frame and goals. But in an environment where cherry picking seems to be preferred (as broad economic recovery is still past the horizon) it might be prudent to wait a bit longer before buying instruments which are over diversified.