5 ETF Investing Mistakes You Must Avoid

The popular oil ETN iPath S&P GSCI Crude Oil Total Return Index ETN (OIL - Free Report) was trading at almost 50% premium over its NAV for some time last year. In fact, Barclays had issued a notification warning investors about ETN premiums.As expected, the premium plunged after some time, making investors vulnerable to unexpected losses.

Investors should make sure to check the previous day’s closing indicative value on sponsor’s website. They can also check the intraday indicative value on yahoo finance using the ticker for the ETF and adding “^” and “-IV” at the beginning and end. So, for OIL ETN, the ticker for intraday indicative value is ^OIL-IV.

Ignoring What’s Inside Your ETF

Most ETFs are very transparent products and many disclose their holdings on a daily basis. However, most investors focus just on the name and fail to delve into a fund’s holdings. Sometimes names don’t exactly reveal what the ETF holds inside.

For example, look at the iShares Dow Jones US Home Construction ETF (ITB - Free Report) and the SPDR S&P Homebuilders ETF (XHB - Free Report); both are homebuilding ETFs as suggested by their names. However, the products are actually quite different if you look at their holdings. ITB has about 66% of its assets invested in the homebuilding industry XHB has less than 32%.

Avoiding Low Volume ETFs

Many investors confuse low trading volumes with the liquidity of an ETF and some even avoid newer ETFs, which may have better strategies but low trading volumes, in favor of older, more popular products with higher trading volumes.

ETFs are different from stocks in this area and their trading volume should not be interpreted like stock trading volume. The liquidity of an ETF is not determined by its trading volume but by the liquidity of underlying shares (ETFs' holdings).

At the same time, low volume does usually lead to wider bid-ask spreads, which add to the trading costs. So, these ETFs are not suitable for frequent trading. And it does make sense to use limit orders while trading in low-volume ETFs.

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Chee Hin Teh 3 years ago Member's comment