A number of investors may have been caught by surprise when it comes to certain exchange traded funds (ETFs). If you’re among them, there are some simple steps you can take when it comes to avoiding unpleasant surprises so you don’t get burned again.
Many ETFs are straightforward in both their performance and in how they’re taxed. However, there are also an increasing number of ETFs that go beyond the plain vanilla treatment.
Take short and leveraged funds. Using them in a manner for which they weren’t intended is going to lead to some disappointment on the part of the investor.
Complaints concerning leveraged or inverse ETFs are often based upon the long-term returns that the investor expected and did not receive. The issue is that these funds are not made to be buy-and-hold investments, something the providers are very open about. They are to be traded daily. But it is up to the investor to understand the intricacies of how these funds work, reports Matthew Hougan for Index Universe.
Commodity ETFs are another area of confusion for some investors.
Those who are chapped about the commodity-focused funds must inform themselves about the risks of both contango and backwardation, as well as realize that crude oil futures are a different animal from spot crude. Spot prices and future prices also differ, so be aware.
