On the surface, exchange traded funds (ETFs) are easy to use, even easier to research and one of the most innovative financial products of the last decade. But they have their finer points that all investors should be aware of.
Many of these points came up at last week’s Charles Schwab event in New York, attended by, among others, Shanthi Venkatamaran for The Street. We’ve tossed in a few of our own points, as well. [Schwab Event Celebrates ETF Industry Growth.]
- Get to Know the Index: Some ETFs tracking the same sector or asset class might have similar names, but don’t assume they’re carbon copies. Among the things that may differ in include holdings, component weightings, sector weightings and index strategy. Look under the hood by using the ETF Resume.
- Understand the ETF Structure: Many similar ETFs are structured differently and it is important to pay attention to this. Commodity ETFs are a prime example: they can hold the commodity itself, futures contracts or equities. Whether the fund is an ETN or a limited partnership, this is important, as the tax treatment changes, thus cutting into principal and overall performance. You can find the prospectus for any ETF on the ETF Resume page to find this information.
- Keep Tabs on the Cost: One of the most popular ways to evaluate an ETF’s cost is by looking at the expense ratio. This is an important aspect, but don’t forget the other costs: liquidity, tracking error, commissions and taxes. [5 Ways to Cut the Cost of ETF Investing.]
- Know the Best Trading Practices for ETFs: Try avoiding market orders and use limit orders instead. Limit orders are executed only at a specific price, thus ensuring you do not sell or buy at an unfavorable price. Market orders put the trade through immediately, and the cost may not always been what you had hoped. [How To Avoid Costly ETF Investing Mistakes.]
- Have a Strategy. And do it before you buy. If you wait until it’s too late, chances are that you’ll find yourself hemming and hawing on making that trade. Determine when you will sell before you do anything else, and you’ll find it easier to execute when the time comes. [How to Follow Trends.]
- Know Where to Go. Where are you getting your research? Every ETF investor should know where to look to answer questions they have about ETFs. We have a full range of tools on ETF Trends, including the ETF Analyzer and the ETF Resume. With these two tools, you can see where ETFs are in relationship to their long-term trend lines, long-term performance, assets, holdings and so much more. Premium members can set up alerts, portfolios and watchlists. Go here for more information on premium membership.
Tisha Guerrero contributed to this article.
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.