5 ETF Investing Mistakes You Must Avoid

ETFs are becoming increasingly popular with investors due to their low cost, transparency, easy tradability and tax efficiency. ETFs Have democratized investing since individual investors now have access to many investment opportunities that were earlier available only to sophisticated, high net worth individuals.

Despite their widespread use, there are many misconceptions regarding ETFs leading to costly errors, which can be easily avoided. This article aims to help investors avoid some of those mistakes and become more successful ETF investors.

Ignoring Fund Expenses

Some investors assume that all ETFs are low-cost instruments and fail to pay attention to the fee charged by an ETF.

Expense ratio is an important factor in the return of an ETF and in the long-term, cheaper funds can significantly outperform their more expensive counterparts, other things remaining the same.

ETF expenses have really come down of late as the price war between large ETF providers has escalated. Particularly if you’re investing in a plain market-cap weighted ETF, you should expect to pay very low fees. For example, the iShares Core S&O Total US Stock Market ETF (ITOT - Free Report) charges a miniscule fee of 3 basis points. The ETF is an excellent way of getting exposure to the entire universe of US stocks.

Even the more complex ETFs—like Smart Beta ETFs that use higher cost alternative weightings with the aim of outperforming the market—are becoming very cheap now. Goldman Sachs ActiveBeta US Large Cap Equity ETF (GSLC - Free Report) charges just 9 basis points in fees.

While expense ratio is usually the biggest component in total investing cost, investors should also consider other costs like bid-ask spreads and commissions before investing. (Read: Expenses Matter-Dive into 7 Low Cost ETFs)

Buying an ETF above Its NAV

ETFs usually trade at fair prices, i.e. close to their intrinsic values or aggregate values of their holdings. But at times certain ETFs’ prices deviate from their NAVs and they can trade at a premium or discount to their NAVs. If you buy an ETF (or an ETN) when it is trading at a premium, you can incur losses if you sell after the premium crashes.

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Chee Hin Teh 3 years ago Member's comment