By Chloe Bennet
Exchange-traded funds have become quite the popular investment partially because of their sheer simplicity. Investors have taken to ETFs since their appealing nature of near-total transparency and easy to understand taxation structure.
Although there are a number of advantages to ETFs compared to traditional mutual funds, there are still plenty of mistakes that can be made, and they are definitely not foolproof. Let’s take a look at the top 5 common mistakes that are made when selecting ETFs to invest in.
Looking at cost before structure
Decreasing expenses is great, and ETFs are an ideal way to achieve this. However, as they gain in popularity, it seems as though there is a matching gain in the reluctancy of investors to the embedded fees involved. So, while keeping costs lower is fantastic, it shouldn’t be done at the expense of the overall gain in the long run. What will have the most significant impact on your returns, far above the fees involved, are the index construction criterial and asset allocation, so put the bulk of your attention in those areas.
“Don’t lose sight of the long run goals. You may think having a fund with a slightly lower expense rate makes sense, but if you’re not able to understand it, a better choice is to go for a fund that’s easier for you to comprehend, even with a higher expense ratio,” outlines Scott S. Gordon, economic expert at EssayRoo and EliteAssignmentHelp.
Looking at one bad performer, rather than the overall cast
There will always be the rogue ETFs that fail to perform as they should have, and set a bad precedent for the rest of the bunch. It’s important to remember that, by and large, ETFs perform extraordinarily well for their shareholders, and that the overall impression of them should not be set by a few bad apples.
Similar to stocks and mutual funds, there will always be ETFs that exist that are performing far below their expectations, but it’s important to see the forest for the trees, and not just focus on the lesser performers.
Not recognizing a vulnerable or failing ETF
There needs to be a certain level of awareness for ETF investors, where they are at the very least able to recognize a vulnerable ETF that is more susceptible to failing. Those with less than three years of history, lower trading volume and less assets are the most at risk for failure.
Thinking all ETFs in the same sector will perform with the same results
A lot of things factor into the success of failure of an ETF, and even those that are in the same sectors can perform quite differently. It’s important not to base your investment decisions on the success or failure of other ETFs within the same area of the market.