In the last year, the number of exchange traded funds (ETFs) and assets have quickly gathered steam. Outflows have lately vexed the industry, but it’s just a sign of the times as investors have become skittish about the markets – not a problem with ETFs.
The most popular funds are the ETFs that closely track the movements of the S&P 500 or the closely followed sectors, such financials. The recent explosion of new ETFs have hacked up the market in obscure or thin ways that can confuse any investor.
Ben Steverman for BusinessWeek has a few tips on how to make sense of the confusion:
- Watch the taxes and fees. Tax efficiency and low fees are the main reason ETFs are recommended. Some of the newer, more specialized or narrow funds have the highest fees, so do your research.
- Beware of the less popular ETFs. The narrower ETFs give exposure to a sub-section of the market that was once harder to access. Some of these are better suited for a short term trader than an individual investor. Some of the more lightly traded ETFs have a hard time matching the returns of their underlying indexes, aka tracking error.
- Resist the urge to trade. Because ETFs are easy to buy and sell, many times the temptation to trade frequently takes over. The fees will eat into returns, so it is better to think long-term.
- Don’t bet much on a narrow strategy. Is an ETF what it really says? A specialty ETF claiming to narrow in on a specific sector may be dangerous. You need to do you r homework to find out what the fund actually invests in.
The more products that there are means the more choices investors have. It is up to the individual investor to do their homework and decide what’s right for them, their strategy and overall goals.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.