I was listening to the recent Dave Ramsey podcast as I do from time to time and while I normally agree with his advice he gives, one piece of advice regarding ETFs caught me off guard and has prompted me to investigate what the heck he was talking about.

In the podcast episode from August 5th, 2013 (at 4 min 55 seconds in), a woman calls in to tell Dave how her financial advisor has her invested in an ETF fund and was going to move her husband’s investments into an ETF as well, and thus wanted to get Dave’s advice on whether this was a good idea.

For those of you that don’t know, the most common definition for ETF as it applies to investing is “Exchange Traded Fund.” For the most part an ETF is similar to a mutual fund except that it is traded on stock exchanges and typically setup to track a particular index like the S&P 500 for example. Because an ETF is not actively managed, you typically get the same performance of whatever index the fund is tracking at a very low expense ratio. This is good for those who want to get the same returns as a market index, like the S&P 500, without spending a lot on fund expenses like you would a managed mutual fund.

Now in this particular Ramsey podcast, Dave describes an ETF as an “Electronically Traded Fund” which is surprising that he would interpret the acronym as such, but it’s possible that he made a slip of the tongue, no big deal, right? However, he then goes on to explain that the only reason to use an ETF was for frequent trading and market timing…. WHAT!!!

I was a bit taken aback by his explanation since it has been contrary to much of the research on ETFs I’ve done myself, along with other investing advice I’ve read from the likes of John Bogle who advises a buy and hold strategy using ETFs, quite the opposite to what Dave Ramsey was talking about.

Figuring that Dave probably just had a brain fart and confused Exchange Traded Funds with some kind of high speed electronic trading, I decided to search his website to see what else he had to say about ETFs and found the following:

QUESTION: Charles on Facebook asks what Dave thinks of an exchange-traded fund (ETF) as an investment device. Dave explains what it is and why he doesn’t like it.

ANSWER: The main reason to do an ETF is that it allows you to trade your stocks or trade your mutual funds easily and often. I don’t believe in that strategy. That implies you are trying to time the market, and you’re trying to buy things at the low point and ride them up to the high point. I am a buy-and-hold guy based on my understanding of the market, so I have no need for ETFs for that reason. I wouldn’t recommend them because I don’t recommend you buy and sell all the time.

Again, Ramsey here is saying that if you buy ETFs then it implies that you are buying and selling stocks all the time. And while I suppose you could buy and sell Exchange Traded Funds frequently, I don’t believe that is the strategy for most people who buy ETFs, quite the opposite actually. It seems to me that the ETF investment vehicle is more suited to people who buy and hold over the long term.

Given that Dave even says himself that he is a “buy and hold guy” and often recommends investing in basic index mutual funds, it’s for this reason that I believe Dave Ramsey has a fundamental misunderstanding of what an ETF actually is when people ask him about it. Otherwise he would know that the ETF investment vehicle is quite conducive to his own investment strategy of buy and hold. He seems to be confusing Exchange Traded Funds with some other type of electronic trading, which is not good since he is giving people incorrect information about this particular type of investment vehicle.

Now the point of this article isn’t to slight Dave Ramsey, I think he is a genuinely good guy who has certainly helped a heck of a lot of people, but I do not think he is infallible and is certainly capable of mistakes, as we all are. The point is that it’s important to realize that while there are many great authoritative financial advice gurus out there like Dave, it is still important to do your own homework and your own research, since the best investment of all is your own intellect.