Exchange traded funds (ETFs) are great investing tools for anyone who wants to participate in the stock market. But that doesn’t mean there aren’t guidelines worth considering to ensure your success.
ETFs are designed to give investors a way to gain exposure to hard-to-access market niches or to the performance of an index without having to handpick stocks, according to Financial Web. [ETFs to play the major indexes.]
There are good strategies and bad ones. Here are a few of the things you shouldn’t do:
- Trying to catch returns. At times, you may enter an area of the market based on hearsay or past performance. Instead, examine the fundamentals and look at the trend lines. Also consider whether a fund is actually right for you – what’s great for your next door neighbor may not be what you need.
- Trading too much. We’re advocates of actively managing your ETF portfolio and setting reasonable stop losses, but it’s important to know the impact of too-frequent buying and selling. Doing it as often as you’d buy and sell stocks may result in increased transaction costs and tax issues – short-term capital gains are higher than taxes payable on long-term capital gains. Be sure to also consult your tax expert. [ETFs and taxes.]
- Sticking to a bad asset class. Know when the trend is over. Instead of wasting your time in a fund that has dropped below its 200-day moving average and hoping that it will come back, look around for other opportunities. By not doing so, you could be missing out on the chance to be in on a potential long-term uptrend. [Why diversify?]
- Making assumptions about funds. Investors shouldn’t assume from an ETF’s name that that’s what it holds or assume that just because a fund has the word “global” in the name, it doesn’t have a heavy weighting in the United States. For example, the SPDR FTSE/Macquarie Global Infrastructure 100 (NYSEArca: GII) has a 39% weighting in the United States. We’re not saying it’s good or bad. The question is: Is that the exposure you want? [Know your holdings.]
- Not having a plan. You need a plan before you invest, before your emotions can get in the way and trump logic. Our plan is using the 200-day moving average – when a position is above, it’s a buy signal; when it drops below or 8% off the recent high, it’s a sell signal. [For more on trend following, check out The ETF Trend Following Playbook.]
For more information on investing in ETFs, visit our ETF 101 category.
Max Chen contributed to this article.