Exchange traded funds (ETFs) have earned their way into the mainstream investing arena, and with their quick popularity and success comes some controversy, debate and even criticism. But let’s stick a fork in some of those fallacies, shall we?
Ron DeLegge for ETF Guide shatters four ETF myths that are just simply not true:
- ETFs encourage hyperactivity among traders: While intraday trading is a modern convenience of ETF trading, there is no way that the flexibility if an ETF led to the so-called ADD of traders and investors. Large institutions are responsible for large trading volumes on exchanges, and many traders who do so often have been doing so long before ETFs were around.
- Bid/ask spreads are out of control: ETFs with lower trading volume have larger bid/ask spreads than those that have higher trading volumes, as a rule. A cost impact of a bid/ask spread is universal in all investments, not only ETFs, so it’s not accurate to pin this on them.
- Short ETFs mirror the inverse long-term benchmark performance: Inverse and short ETFs are not buy-and-hold investments and they do not do the opposite of whatever the benchmark they track is doing. Rather, they are designed to replicate one to three times the daily performance of the underlying benchmark. Long-term and short-term are two entirely different approaches.
- The best ETFs are the ones with lots of trading volume: Like all things, just becuase something or someone is popular, heavily traded, followed by the media or follows a famous index does not automatically make it a good choice. Do you research and look into a funds holdings because you may be surprised at what is in say, the Dow Diamonds (DIA). Furthermore, it’s not too wise to assume that every product is right for every investor, so do your research and look inward to figure out your goals, then go from there.
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.