The widespread adoption of exchange-traded funds has allowed everyday investors to become successful investors. These innovative tools achieve this task by reducing costs, increasing diversification, enhancing transparency, and mitigating taxes, just to name a few.
Yet, as an investment advisor, I am still witnessing many investors analyze these vehicles through a backwards lens. They randomly prioritize features or portray risks based on a hodge-podge of investment criteria. This creates a breakdown in the framework to build a cohesive portfolio.
The following are common mistakes to avoid when selecting and sizing ETFs:
Fund Company Tunnel Vision
This is a holdover from the old mutual fund days when investors had their money with Vanguard, Fidelity, Putnam, or T. Rowe Price. You rarely saw anyone who opened accounts at varying fund companies because it was a huge hassle to manage.
ETFs are wonderful because you can buy just about any of the 2,100 choices from a basic brokerage account. This opens a wide array of choices that allows you to pair multiple fund companies, indexes, or investment styles under the same roof.
Related: To Buy or Not to Buy ETFs
For instance, Vanguard has done a fantastic job of prioritizing costs and rigid index construction in their practice. It’s in their DNA and has allowed the company to become a fantastic success story. Nevertheless, they don’t run the cheapest ETF in every category. Several funds from BlackRock (iShares), Charles Schwab, State Street (SPDR), and others offer similar funds with lower expenses and comparable indexes.
A comprehensive analysis should compare the index construction criteria, total fund cost (including transaction fees and expense ratio), along with performance and other metrics. It may be that Vanguard makes up the core of your portfolio, but you are better off substituting other ETFs in satellite roles to build the portfolio that works best for you.