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November 3, 2006
Most ETF Managers Don't Invest in ETFs
In yet another case of "invest where I say, not where I do", this story from today's WSJ. It seems that most managers of exchange-traded funds (ETFs) don't, you know, actually invest in exchange-traded funds.F'rinstance:
At State Street, none of the five ETF managers, two subadvisers or trustees listed in filings as of December were invested in the firm's ETFs. State Street offers 40 ETFs, many tracking broad markets, and has others on the way this month designed to invest in international real estate and Japanese stocks, as well as other areas.Granted, the industry has an explanation, which is wonderful in itself, a kind of "pay no attention to fund manager behind the curtain":
Investors "shouldn't take any meaning from managers not investing in their ETFs" and should instead focus on issues like risks, costs, returns and taxes, says John Demming, a Vanguard spokesman.Sure, and people shouldn't read anything into waiters at the restaurant of your choice shunning the place. Meaningless stuff. Absolutely.
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Paul, every analyst on Wall St. wants to be a hedge fund manager; every index fund manager ultimately wants to be Warren Buffet.
As we know, few, a very very few, can make a go of it.
Despite being indoctrinated by efficent markets theory, and slogging through "A Random Walk Down Wall Street," all these guys want to be great stock pickers.
That doesn't obviate the virtues of index funds; it only underscores the vice, and futility, of trying to be Warern Buffet.
I'm guessing that as employees of a mutual fund company, managers are required to invest in the company's own funds and get special deals on their own fund investments. Why enter the market to buy an ETF through a broker and pay a brokerage fee when you can buy the open end equivalent direct from your won company for free.
The ETF manager would say that when waiters eat in the restaurant where they work they don't order table d'hote or even a la carte, since they are more intimately familiar with the prepared dishes they don't dine as a restaurant patron would.
Likewise a fund manager by virtue of insider knowledge is more capable of personal cherry picking.
So long as the fund performs what does it matter?