Money Magazine Ask the Mole

How to make money in ETFs

Exchange-traded funds are simple and cheap. Beware of advisers who would wipe out that advantage.

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By the Mole, Money Magazine's undercover financial planner

Have future topics for the Mole to address? E-mail him at

(Money Magazine) -- At a financial-planner conference earlier this year, I spotted a session called "ETFs: Are Your Clients Investing Without You?" I had to go. We advisers are well aware of the advantages of exchange-traded funds: broad diversification, low costs and a slim tax bill.

Still, as a group, advisers are not big fans of ETFs. We regard them as a threat. With ETFs you can create a simple, low-cost portfolio that beats the pants off our professionally designed plans. Why pay us 1.5% to 2% a year to do something that you could manage yourself?

Good thing we know how to take a threat and turn it into an opportunity. At this presentation we heard about ETFs so over-engineered that few amateur investors would touch them -- nor should they. Where is it written that ETFs must be simple and tax-efficient? Use the ETFs that Wall Street has dreamed up to confuse your clients, and you'll keep them for life.

Thus you might hear ETF pitches like these:

"We are bearish, and ETFs that short the market are just the ticket."

"It's important that your money work hard. We buy ETFs that use leverage so your gains will be twice as high." (He likely won't mention that your losses will be similarly magnified.)

"You need to avoid the sectors and countries that lag the market, so we will choose the right ETFs for this economy."

While this may sound better than harnessing the returns of the entire stock market, it's just the same old, same old of paying one expert to outsmart another expert. It doesn't work.

My advice is to choose the only indexing path that guarantees that you will beat most stock investors: own the whole market at the lowest cost and greatest tax efficiency using ETFs like Vanguard Total Stock Market (VTI), Vanguard FTSE All-World Ex-U.S. (VEU) and Vanguard Total Bond (BND).

We advisers have been claiming to beat the market for decades. Then index funds proved us wrong. Now, with new ETFs, we've figured out how to claim to use indexing to beat the market. Don't believe it.

The Mole is a certified financial planner and certified public accountant who -- in the interest of fairness -- thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail To top of page

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