Due to their simplicity and low fees, exchange traded funds are a good match for retirement accounts. Nevertheless, people who are investing toward retirement should still know what they are getting themselves into.
Tim Parker for Investopedia emphasizes that investors should still do their homework and look under the hood before investing in any ETF. [401(k) plans]
- Expenses. While there are some broad index-based ETFs that have expense ratios of as little as 0.04%, more specialized offerings could run up to 2%. There are over 1,400 ETFs on U.S. exchanges, but only 50 have fees over 1%. [Trading Costs]
- Tracking an Index. ETFs try to reflect the performance of an underlying index, but they won’t always perfectly match it. Investors may notice slight tracking errors due to a number of reasons, including fees, expenses and volatility, to name a few. [Indexing]
- Management. Most ETFs come with low fees because they are passively managed index-based products. However, there are also actively managed ETFs that come with slightly higher fees to cover the added management and trading costs. [Actively Managed ETFs]
- Index ETFs Vary. While there may be similar index ETFs that cover the same region or area of the market, no two ETFs are alike. Different fund providers offer disparate strategies that will produce varying results. [Know Your Holdings]
- ETFs & Diversification. Investors gain instant diversification with ETFs as the funds hold a basket of securities. However, investors become less diversified when taking on more focused sector or asset class plays. Generally, advisors would not tell investors to pile into one specific area of the market, but instead make larger market indices part of a core holding.
For more information on ETFs and retirement, visit our retirement category.
Max Chen 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.