As exchange-traded funds become more popular, many wonder whether or not these investments are too risky. Because of the way they are set up, most investors can day trade within their ETF accounts. Many question whether that is a good idea, especially for those ETF funds included in 401(k) plans.
John Ameriks, a Vanguard principal who leads Vanguard Investment Counseling & Research Group, said that there aren’t as many differences between ETFs and mutual funds as people believe. The biggest difference is that the ETF structure “implicitly places the burden of any transaction costs on the individuals doing the trading. To some extent, that’s what people are worried about. They focus costs on the people trading. Pair that observation with the belief that ETFs cause people to trade more and you get the story that ETFs could be bad for people,” he said. “We don’t see them trading more than they are trading with other vehicles. It just means they are bearing the freight of transactional activity and liquidity services they would get from a fund.”
One risk of ETFs in 401(k) plans is if you have an advisor that builds you a portfolio using narrowly defined ETFs, like buying just Brazil. “Something limited in scope may not be a good fit for a 401(k). They don’t have a good track record and are too risky,” he said.
As long as ETF investors stick with the four main asset classes: stocks or equities, fixed income or bonds, money market or cash equivalents and real estate or other tangible assets, they will lower their risk, he said.