Put Your Money Where Your Mouth Is?

"Put Your Money Where Your Mouth Is?" That's the headline of an article in today's Wall Street Journal that questions whether ETF managers should invest in their own products. Apparently, according to SEC records, many do not. The article suggests terrible things about those managers....

I'd like to defend them.

In the case of an actively managed mutual fund attempting to beat the market, yes, a manager should indeed "put his money where his mouth is" -- absolutely. I would not want to invest in any actively managed fund that the manager did not have enough faith in to plunk some his own personal funds. But index mutual funds and (most) ETFs? That's a whole other story.

There are many perfectly good reasons why an ETF manager might not want to invest his or her own money in a particular index:

1. His risk profile may not match yours...and perhaps the QQQQ is a bit too risky for his own financial situation.

2. She may already have funds invested in the index, perhaps through an index mutual fund, and would have to pay huge capital gains to switch to the ETF.

3. He's making deposits or withdrawals on a regular basis, in which case, an index mutual fund may make better sense than an ETF.

4. She may have just bought herself a new Jag, and has no money to invest.

In short, don't be concerned about where the manager of an index fund keeps his own loot....concern yourself with how well he tracks the index, and how much he charges you to partcipate in his fund.

Russell