Five mistakes when buying ETFs

Five mistakes when buying ETFs






Most investors don't know what ETFs all are about. In fact, many of them think that what they're buying is an individual stock.  Here's a rundown of five mistakes to avoid when investing in ETFs:  

1. Buying the HOT New Thing. 

You'll hear about "the hottest new ETF" all the time, and it's true - there are probably 50 or more ETFs launched every year. But this doesn't mean you should jump on the bandwagon and buy them all! Most of these funds will fall by the wayside after a few years, and some will go belly up within a matter of months.  

2. Buying something you don't understand.

If you can't explain exactly how an investment works, don't buy it. That's not just true for ETFs - it's true for stocks, bonds, mutual funds and any other security you might be thinking about buying.  Thinking that all ETFs are created equal. There is no such thing as an "average" ETF. Some have a narrow focus (like gold mining companies), others cover different regions of the world (Europe vs Asia), and still others aim at reaching certain types of income (stocks paying high dividends). The best way to choose an ETF that fits your investment goals.

 3. Thinking that all ETFs are Created Equal

There's no question that some ETFs are better than others, but many investors treat all ETFs equally - as if all of them are perfectly good vehicles for their portfolios. The reality is that not all ETFs are the same. Some have higher fees or expenses than others, and some have other structural issues, like high levels of concentration in a single security or sector. Before buying an ETF, it's important to understand what you're getting.

4. Trading just because you can

This one is pretty obvious: If you want to buy an ETF for the long term, don't trade it just because you can. Trading increases the cost of trading and reduces the tax efficiency of your investment. Stick to your plan and buy and hold for the long term.

5. Buying using Market Orders

Lastly, when buying ETFs through online brokerages and financial planning sites, be careful about how you place your orders. Some investors mistakenly think that Market Orders will get them a fair price on their purchase of an ETF right now, but market orders can get trades at prices you didn’t really want. Consider using Limit Orders means you agree to buy and sell the ETF at a certain price. This puts the control back in your hands and can help you set the price on your terms.


The ETF Book: All You Need to Know About Exchange-Traded Funds by Ferri

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