There are some great ETFs from smaller, independent issuers that are tackling intriguing investment paradigms as well. Don’t be afraid to give these funds a second look if they fit the model you are looking to emulate.
2. Prioritizing Cost Over Structure
I’m all for lowering expenses and substituting ETFs for mutual funds or insurance products is one of the easiest ways to realize this potential. Yet, more recently, ETF investors have become overly sensitive to every basis point of embedded fees. They often forget that index construction criteria and overall asset allocation will have a far bigger real-world impact on your returns than anything else.
When comparing similar ETFs, it’s important to understand how the fund selects, weights, reconstitutes, and rebalances its components. This will allow you to understand how the top 10 holdings contribute to overall performance and what factors may influence a change in that priority.
Don’t become so overly conditioned to the hunt for the lowest costs that you lose sight of what you own and why you own it. Choosing a fund with a 0.35% expense ratio that you can stick with through any market may ultimately be a better choice than a fund with a 0.05% expense ratio that you don’t understand.
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3. Letting One Bad Apple Spoil the Bunch
There is always going to be that one ETF in the news that has blown it for the industry. Maybe it was the result of a shock in the market or an index that failed to perform as its back-test intended. It’s usually because of an innate red flag such as leverage, exotic derivatives, or some other esoteric factor.
Whatever the case may be, it’s important to remember that 90% or more of ETFs are doing right by their shareholders. The funds that bring negative press have done so because they have taken asymmetric risks to try and achieve an unreasonable outcome. Don’t let that deter you from understanding and owning these tools.
You are going to be far better off sticking with funds that are transparent, easy to understand, and with proven track records of success. If you are just starting out on the track of finding your first ETF, these tips may help.
This article has been republished with permission from FMD Capital.