The conventional wisdom is that the more choice they have, the better it is for consumers.
But, as Phillip Coggan asks in today’s FT, what’s the point if none of the new options being provided is any better than what’s already available?
Coggan looks at the different types of products the investing industry is busy rolling out and explains why you should probably avoid them.
For example:
Active ETFs are cheaper than active mutual funds, but they’re still three or four times more expensive than passive ETFs and no more likely to beat the market net of costs.
Option-based ETFs provide higher income in the short term, but investors can already achieve the same, and at lower cost, by simply pairing a passive equity ETF with a passive bond ETF or cash account.
Private credit can deliver decent returns, BUT, by its nature, is illiquid. Also, the fact that funds that invest in private credit tend to be issued by the same private equity firms that are issuing the debt creates a potential conflict of interest. And, like any other high-yield debt, private credit is likely to experience defaults in the event of a recession or sustained rise in interest rates.
The Starbucks analogy
In short, Coggan says, greater choice is not necessarily in consumers’ interests and uses coffee chain Starbucks as an analogy. “Starbucks,” he says,” makes a virtue of its ability to offer a wide range of caffeinated beverages. Consumers can order a Java chocolate chip Frappuccino with whipped cream if they wish. Whether that is the best value, or indeed the healthiest, option is another matter.”
Yes, all of these new product innovations offer the potential for better outcomes but nothing more. As Coggan concludes: “One rule should never be far from investors’ minds: higher returns are not certain, but higher fees are.”
Those with an FT subscription can read the article here:
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