ETFs: The Illusion of Safety and the Erosion of Responsible Ownership
Exchange-Traded Funds (ETFs) had become the darlings of the modern investment world—but surprise! As markets took a hit in recent weeks, uninformed “investors” suddenly looked bewildered: “What if my ETF goes bankrupt?” Well, this most likely won’t happen, as an ETF is a product, not an entity.
But let’s start from scratch.
ETFs are often marketed as a safe, low-cost, and convenient way to diversify your portfolio. If by “safe” we mean less volatile than stock-picking, that is mostly true. (SAFE DOES NOT MEAN YOU WILL MAKE A PROFIT FOREVER. If your broker tells you so, shows you graphs about past performance, etc., give them the slip…)
So, what’s wrong with them? ETFs are safe, low-cost, and convenient in the same way fast food is. (Hint: they’re not.)
In fact, they amplify systemic risks, encourage speculative behavior, and undermine the very principles of responsible ownership that underpin healthy capital markets. Let’s unpack why ETFs are far from the risk-free investments they are often portrayed as—and why those who buy them are speculators, not investors. (Therefore, buying them mostly comes down to an ethical, not a financial, decision!)
ETFs and the Illusion of Safety
The primary selling point of ETFs is their diversification. By holding a basket of stocks or bonds, ETFs do indeed reduce the risk associated with individual securities. For beginners this diversification might create a false sense of security. They assume that because they own a slice of the market, they are insulated from catastrophic losses. This is a dangerous misconception.
ETFs do not eliminate risk; they simply distribute it. When you buy an ETF, you are still exposed to the market. And when the market tanks, as it inevitably does from time to time, your diversified ETF portfolio will tank with it. The 2008 financial crisis and the COVID-19 market crash of 2020 are stark reminders that diversification does not equate to immunity.
The ETF Pyramid Scheme?
In fact, the widespread adoption of ETFs may even increase systemic risk. As more and more investors pile into these funds, they end up owning the same assets, creating a dangerous concentration of risk. If a significant portion of the market is held through ETFs, a downturn could trigger a cascade of selling, exacerbating the crash.
One could even compare it to a Ponzi scheme. As more investors pour money into these funds, they drive up the prices of the underlying assets, creating a self-reinforcing cycle of growth. But this cycle is not sustainable. (It is not with individual shares either…) Eventually, the music will stop, and those who bought in last will be left holding the bag. This is not unlike the Dutch tulip mania of the 17th century, where the price of tulip bulbs soared to absurd levels before collapsing spectacularly.
Speculators, Not Investors
When you buy an ETF, you are not making an active decision about the value of the underlying companies. You are simply betting on trends. This is speculation, not investment. True investment involves careful analysis of a company’s fundamentals, its management, its competitive position, and its values. It requires taking responsibility for your ownership and exerting influence as a shareholder to ensure the company is managed ethically and sustainably. (While we understand it’s easier to just complain about unethical big business on your smartphone—made with cobalt from Congo—while hoping to cash in on HUAWEI shares…) This partially explains why the market is full of “crappy, unethical, sleepy boomer companies” that survive not because they are well-managed or innovative, but because they happen to exist.
Let’s have a closer look at the ethical part!
Owning something, whether it’s a piece of land or a share in a company, comes with responsibilities. But when you buy an ETF, you sort of abdicate these responsibilities.
It’s like when you don’t cast your ballot on election day, thinking that probably all the others will vote correctly so you can enjoy the weather instead. It might go alright, but there’s no guarantee…
Taking Responsibility for Your Actions
Don’t get us wrong—diversification is a sound investment strategy, and for the average person with limited resources, ETFs can be a convenient way to achieve it. But you should choose consciously and well-informed.
The rise of ETFs reflects a broader trend in society: the desire for easy solutions and the avoidance of responsibility. But investing, like citizenship, requires effort and engagement. If you want to be an investor rather than a speculator, you must do the work. Research companies, assess their value, and take responsibility for your ownership. (Nobody but Warren Buffet semms to be able to resist market trends thou…) If you choose to go with the flow, don’t be surprised when the flow leads you over a cliff.
In the end, the market is not a perpetual motion machine. It is a human institution, shaped by the choices of its participants. If we want a market that is fair, ethical, and sustainable, we must take an active role in shaping it.
ETF: Exchange Traded Failure?
