Are ETFs Distorting The Market?

These days you can barely set foot inside a cocktail party without hearing chatter about ETFs or Exchange Traded Funds. In fact they’re nearly as mainstream as those little hot dogs on toothpicks.

But what exactly are ETFs. According to Investopeida, they’re “a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.”

In fact, ETFs have become so popular that almost a quarter of all investors at Schwab use ETF's as their primary way to trade. But are ETFs distorting the market?

FM trader Jon Najarian thinks that may, in fact, be the case.

For your consideration, the major gold ETFs such as the GLD now hold more reserves of the precious metal than Switzerland.

On top of that, highly leveraged ETFs such as the SDS which is double short the S&P 500 are sucking inexperienced investors into risky trades and manipulating the market averages in the process.

Jeff Macke recommends using ETFs cautiously, They’re not for buy and hold. ETFs such as the SDS are like dating a stripper, he says. “It’s fun but it’s not going to end well. Don’t hold them overnight.”

Jon Najarian has a lot to say on this issue. To hear his full explanation watch the video above!

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Trader disclosure: On Feb. 27th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Najarian Owns (DNA) Calls; Najarian Owns (DOW) Call Spread; Najarian Owns (FCX) Call Spread; Najarian Owns (GDX) & (GDX) Short Calls; Najarian Owns (GS) Call Spread; Najarian Owns (MSFT); Najarian Owns (MS) & (MS) Short Calls; Najarian Owns (MOS) Stock; Najarian Owns (V) & (V) Calls; Terranova Owns (OTS), (DIS), (FXC), (XBI), (BRCM), (WYNN), (INTC), (DELL), (JOYG); Terranova Owns (AMGN) & (AMGN) Puts; Terranova Owns (IBM) Call Spread; Macke Owns (MS), (GS), (SDS), (TM); Finerman's Firm Owns (MSFT), (RIG); Finerman's Firm Owns (DNA) & (DNA) Calls; Finerman's Firm Owns (BAC) Preferred; Finerman's Firm Owns (WFC) Preferred; Finerman's Firm Is Short (IYR), (IJR), (IWM), (MDY), (SPY), (USO)