Last Updated Aug 24, 2011 9:40 PM EDT
I've long thought that the SPDR S&P 500 fund was the wrong standard-bearer for the industry. Yes, it was the first. But a staid index fund comprised of America's largest blue-chip corporations represents the current ETF industry about as well as Warren Buffett represents the National Association of Day Traders.
The ETF industry today -- both in terms of the types of funds that dominate it and how they're used -- is all about speculation. There are certainly investors who are using these funds as part of a well-considered portfolio that's bought and held for the long-term, but they seem to be a rare breed. Rather, ETFs have largely attracted the attention of speculators, who use the funds to make short-term wagers on their hunches about which sector or style is going to outperform in the next few days.
And those speculators have a veritable Chinese menu of instruments with which to make their bets, which enable them to hone in on the most obscure corners of the global markets. (See my list from last year commemorating the ten worst ETFs.)
Like most wagers -- those made in Vegas and those made on Wall Street -- these bets are driven largely by greed and fear. Therefore there's no better poster child to represent the ETF industry as it exists today than the long-time investment of choice by fear- and greed-driven investors: Gold.
Since the financial crisis hit, gold has undergone a spectacular run -- the SPDR Gold fund has provided an annual return of more than 31 percent over the past three years, and 24 percent over the past five years -- a run led by investors speculators seeking shelter from everything from a falling dollar to falling stock and bond markets to the end of society as we know it. And in a pattern that we've seen time and again with investments that have captured investors' attention, gold's run has been extended by investors eager to own what's hot, pushing prices ever-higher as they clamber to climb aboard the train before it leaves the station.
I'll leave to others the debate about the role of gold in the average portfolio, but I'm quite certain that there's a large segment of the investing public that own a great deal more gold today than they ever have in the past, or will, in fact, own ten years hence. Thirty percent returns have a remarkable impact on our powers of justification.
That fact, of course, leads me to doubt SPDR Gold's long-term staying power atop the ETF hill (indeed, its most recent reign was only a day). Its assets will plummet once many of its new fans experience an (inevitable) period of sub-par returns. And their hunt will begin anew, seeking that new sector of the market which seems to promise spectacular returns; and the ETF industry will be there, with a wide array of choices that seemingly allow them to cash in.
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