When Santa makes his list and checks it twice, he will find out that some people in the exchange-traded fund (ETF) industry have been naughty. ETFs such as S&P 500 Depository Receipts
Not only do ETFs have extremely low annual costs -- Vanguard's Total Stock Market ETF
So ETFs were working great. And then the marketing gurus stormed the gate. At iShares, you can now choose from more than 100 ETFs. One of the strategies at iShares is "tactical rotation," which loosely translates into market timing. That's not very Foolish. It's a way for stockbrokers to generate more commissions or actively manage your account, thus justifying their wrap fees. Individual investors may be lured into trying their own hand at market timing, but I don't think that's a strategy that works over the long run. Further complicating matters is that many ETFs trade on very low volume, which can lead to pricing inefficiencies.
Many of the newcomers to the ETF entourage come with steeper annual costs. iPath's Commodity Tracking Exchange Traded Note and PowerShares Industry Rotation ETF
In the beginning, ETFs followed well-established indices such as the Standard and Poor's 500 or the Russell 3000. Now we have more nebulous and arbitrary groups. PowerShares has invented a new way to look at index construction -- to wit, dynamic indexing, which "can change on a quarterly basis and will use qualitative research for selecting component securities." An index that changes quarterly doesn't sound like passive investing to me.
Close to 400 ETFs are available, and more are in the pipeline for 2007. The industry should follow Vanguard's lead and offer a limited number of low-cost ETFs.
Let me look in my bag of goodies. Hmm. Ah, yes, here it is. This year, the ETF industry gets a lump of coal.
For more Foolishness on ETFs, check out:
There's a whole world of naughty and nice out there! Take a lookat the rest of the bunch.
A re you interested in learning more about ETFs? Check out The Motley Fool's ETF Center . And if you think mutual funds offer a better alternative, check out which funds Shannon Zimmerman likes in The Motley Fool's Champion Funds newsletter.
Fool contributor Buz Livingston appreciates your feedback and believes investors will benefit from professional advice. His idea of a white Christmas is walking barefoot on a sandy beach. He doesn't own any of the securities mentioned here. The Fool has a disclosure policy.