Exchange traded funds (ETFs) have many superior qualities, however, they are not totally foolproof.
While security, transparency and low fees are just the beginning of their attributes, there are loopholes when investing with these tools.
Kirk Shinkle for U.S. News & World Report explains five pitfalls to be aware of when investing with ETFs.
- Size Matters: Stick with funds of a certain size, say at least $50 million in assets. This will ensure liquidity, better pricing and more security.
- Liquidity: The two types of liquidity necessary are daily share trading and the volume of trading within the underlying index. Invest in ETFs that trade 100,000 shares per day to guarantee yourself the best possibility of liquidity.
- Be aware of spreads: Higher spreads cost traders a few extra cents, under normal conditions, but the recent market craze sent spreads up 5% of the value of a share. Spreads should be between five and 10 cents.
- Leverage-What you see isn’t what you get: These types of ETFs are meant to track a day’s trade, not suitable for a buy-and-hold type. So, they may tout a double or triple market move, however, remember the context and make sure you know and can tolerate the risks.
- Taxes: While ETFs do offer a tax advantage, they are taxed at different rates. Some gold ETFs are taxed as a collectible with a 28% capital gains rate, which is more harmful than the 15% for a single stock.
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.