They've got to be ETFing kidding!

What the ETF is going on?

An elderly man finds out he's made a mistake.

Image source: Getty Images

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"Never get between a politician and a bucket of money" goes the old saying.

But the person who said that had obviously never met some people in the finance industry.

Such is the sheer size, scale and scope of the money game – with trillions sloshing around just ripe for having a tiny portion sliced off for an enterprising money manager – it puts politics to shame.

And here's the thing – you don't even have to break the law to do it.

A $1 billion fund charging 1% per annum in management fees? That's a cool $10m just for turning up.

A $100 billion fund… yep, that'd be a billion dollars in fees.

True, not every fund is that big – or charges that much – but it neatly illustrates the issue, doesn't it?

It sure as hell highlights both the incentives and the opportunities.

Now, before the angry letters (people still send those, right?) start, let me clear up two things:

First, yes, The Motley Fool charges fees. We're a for-profit company. I think we've created far more long-term value for our members than we've charged in fees, but we do charge fees. So am I biting the hand that feeds me? Nah, because if members don't like it they leave – I have no issue in highlighting fees as an issue, and if it costs us a few members, so be it.

And second, some of the investment advisors and fund managers earn every cent of those fees. Not all, but some.

I have no issue with people being paid fairly for the value they create.

But my broader point is that a lot of people are making a lot of money from being middlemen and –women — in the finance game.

And my more specific point?

People in this industry are very incentivised to find new ways to get just a little more of your hard-earned cash.

There is no better example than the explosion of exchange-traded funds (ETFs).

Once the bastion of boring, low-fee, index-based managed funds (think Vanguard's ASX 300 index fund), the ETF world has been overrun by fund managers finding new ways of repackaging share portfolios and selling them to you and me.

In fact, as long ago as 2017, according to Bloomberg, there were more US indices than there were individual listed companies!

Inmates running the asylum? Kinda sounds like it, doesn't it?

And here's how it works.

While those ETF managers aren't allowed to give you advice, they can describe their products in particular ways to appeal to investors.

And – while they may not say it (and, more generously, may not even realise it) – they're relying on the halo effect of being an ETF in the process.

So long have we been told that ETFs were good things (the low-cost, index-based type, that is), that when other ETFs come along, they get to trade off that reputation.

ETF implies (relative) safety. Diversification. Lower risk.

Tell that to the investors in the ASX 'BEAR' ETF, who've lost 38% over the past 5 years, while the All Ords is up 17%.

Again, to be 100% crystal clear, I'm not suggesting that the provider of the BEAR ETF (Betashares) is making those claims, or even implying them. They're doing nothing wrong.

But the investor who thinks that ETF is the same as a plain-vanilla index ETF is in for a rude shock.

(Betashares actually goes out of its way to explain that the ETF "…seeks to generate returns that are negatively correlated to the returns of the Australian sharemarket.")

That ETF is actually relatively tame (at least for those who understand what they're getting).

There are double- and triple-leveraged ETFs.

There are ETFs that invite investors to take a punt on a particular industry or commodity.

And their supporters would (correctly) say they're not making anyone buy them. In fact, they're not providing advice at all – just creating a product and letting people use them as they see fit.

But how many people should?

How many really understand the underlying characteristics of the ETF they're buying, including the fees and likely performance?

Or are they just thinking '[Insert cool/trendy/interesting/hot Industry here] is going to be big, so buying the ETF is the most logical step'?

Worse, how many think 'It's safer because it's diversified', or 'It must be okay, otherwise they wouldn't sell it'?

And how many ETFs do we really need on an exchange?

More than the number of companies?

Doesn't that just sound, a little, like the real winners are the ETF sellers?

It gets worse.

One of our marketing team recently shared with me the absolute extreme of the genre – the 'single stock ETF'.


If you can just buy the shares, why is there an ETF?

Well, because the ETF loads up with leverage, so that when you win, you win big.

(Oh, and fees for the 'product manufacturer' – a term that, for a change, is a euphemism that actually does tell you what's going on!)

Sound good?

But what about when you lose?

Should investors really be taking leveraged bets on a single share?


Not with my money and not with your money.

Some will say it's just a product, like any other product, and people can make their own choices.


And the Royal Commission found no one doing anything wrong, huh? Buyer beware?


Someone, somewhere, realised that there are people who would, if offered the chance, take silly risks on leveraged, high-fee, single-stock ETFs.

And so, rather than warning against it… they decided to take advantage of it.

Hey, it's a free country, right? And a free world?

I guess.

But I reckon we already have enough rubbish finance products… we really don't need leveraged, single-stock ETFs!

Now, this is where I turn awkwardly towards telling you about a brand new Motley Fool service, which covers ETFs!

Awkward, in the sense that once I try this deft left-foot step, I'm worried that some readers will think everything above is just a set-up for a sales pitch!

It's not, by the way – I was truly flabbergasted when I found out about those ETFs!

But it's not, for another couple of reasons.

First. If you're a member of any service provided by Motley Fool Australia, you're going to get a nice surprise on Monday morning!

(Hint: You're getting it for free! Was that more than a hint? Oops…)

Second, if you're not yet a Motley Fool member, the service we're launching today (Monday) morning is both our first ETF product and the lowest-price service we've ever launched here in Australia!

By a long way.

It's been something of a passion product for me. I've been fortunate enough to launch a few of those in the last decade, and I'm every bit as proud of this as I was of my role in launching our income-first product, Everlasting Income, and our capstone service, Motley Fool Platinum.


If you're a member of one of our services, check your inbox tomorrow morning.

If you're yet to join and you want to know more about the new ETF service, click here to be on the mailing list when we launch!

I'm pretty excited about it.

And, for the love of God, stay away from leveraged single-stock ETFs!

Fool on!

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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