Any other business | 4 June 2011

There’s always another disaster waiting to happen – so keep your eye on ETFs

If we learned anything from the recent financial crisis, it is that when a thing looks too good to be true, it is. If a sector is attracting frenzied investor attention and pundits say spectacular
growth must continue, it is surely heading for trouble — not next week, perhaps, but soon enough to allow a minority of sceptics to say ‘I told you so’. In markets, good ideas
pursued to extremes mutate into disasters and, at any given moment, someone somewhere is concocting the next one.

And so I draw your attention to Exchange Traded Funds, or ETFs. These instruments — the prototype of which, the Standard & Poor’s Depositary Receipt or ‘Spider’, was
launched in 1993 — are akin to index or tracker funds, except that as the name suggests they are traded on exchanges where their prices move from minute to minute. They offer simple ways of
investing in domestic or emerging stock markets, or classes of commodities. You can tuck them away in your portfolio, or buy and sell them all day long at modest transaction costs. In his guide to
commodity investment (The Spectator, 21 May), Alex Brummer referred to ETFs as ‘an easy dealing alternative’ to shares in mining companies for those seeking exposure to gold or
platinum. In the FT, John Authers called ETFs ‘a great idea… every retail investor with an internet connection can make their own attempt at being a global macro hedge fund
manager.’

So far so good. But as Authers also acknowledged, ‘concerns have begun to multiply’ as the sector has taken off like a rocket — growing by around 40 per cent per annum in the past
decade and accounting for $1.4