Dear 10th Man Reader, ETFs are hands down one of the greatest financial innovations of all time... if you use them properly. Think about it—you’re an individual investor, and you can build a diverse, yet targeted portfolio made up entirely of ETFs, all while sitting at your computer... And if you get it right, you’ll earn good returns, pay low fees, and have access to international markets and diversification. Who wouldn’t want that? I’m speaking from experience here. As you may know, I was around in the early days as the head of ETF trading at Lehman Brothers. I’ve studied ETFs closely and watched them explode into a $4.4 billion industry. It’s incredible. They have truly democratized investing. But in ETF-land right now, it’s a bit like the Wild West: chaos! 
Source: Wikimedia Commons A big reason for the chaos is that many of the best things about ETFs actually enable investors to submit to their worst instincts. Let’s dig into that—the more pitfalls you’re aware of, the less likely you are to fall into them. Investing in the ETF Wild West -
First, people trade too often. The ability to trade intra-day? Great that it’s there, but... If your portfolio is down 30–50% and you have no help, what do you do? Half the country barfed it in 2009! And they vastly underperformed the people who held on for dear life. If you’re a smart ETF investor, you want to buy and hold. -
Second, you’ve got flashy products that are not designed for individual investor use. For example, double and triple leveraged ETFs don’t behave the way people think they should. Of course people get starry-eyed at the thought of daily double returns. Everyone likes the idea of getting rich quick. But I was running the ETF desk at Lehman around 2006 when one of the issuers tried to convince us to be authorized participants for the first leveraged ETFs. I saw how these things worked and asked: “Are these guys nuts?” Most, if not all, individual investors have no business getting involved in these things. -
And third, we’re in an ETF gold rush... with no shortage! That presents great opportunities, but it also means investors have to be more sophisticated and discerning. It’s too easy to get caught up in the ETF fever and pick dangerous ones. Do not get caught up in speculation.
Those are some of the things you need to watch out for: overtrading, flashy products, and getting caught up in the madness. But ETFs Are Still Your Friend ETFs still offer the individual investor an incredible, unrivalled opportunity. Here’s the ideal scenario when it comes to ETF investing. What you want is to use ETFs to minimize volatility while maximizing returns... What you want is to be able to take advantage of the low fees and diversification and all the other benefits without getting unknowingly caught up in the crazy stuff... What you want is to build a high-powered, long-term, all-weather ETF portfolio. If you can do this, you can be one of the few people who reap all of the benefits and avoid the risks of ETFs. You can be one of the pioneering success stories. And in the coming days, I’m going to tell you how you can do this. My 13 years of ETF trading says it’s possible. Watch out for an email from me—I’m going to talk about one key principle you need to start applying to your investing strategy. Stick to it and you’ll avoid a lot of the mistakes we discussed today. But for now, remember: The safety of any financial product depends a lot on how well an investor understands it. Don’t understand it? Either learn about it or run. Which is it? Let me know your answer right here. You can also submit any questions you have about ETFs—they could be featured in an upcoming issue of The 10th Man. 
 Jared Dillian
Editor, The 10th Man
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