3 ETF Investment Mistakes to Avoid

Too expensive; too much risk; poor index construction

Alex Bryan 15 March, 2018 | 11:46
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It is easier, and often more important, to avoid mistakes than to identify great investment ideas. Among the low-hanging fruit, you can improve your odds of success by avoiding strategies that cost too much, take too much risk, or are poorly constructed. Unfortunately, the ETF landscape is littered with funds that suffer from these problems, and it’s not always obvious which funds do. But you can identify them if you know what to watch.

Too Expensive
How do you know whether an ETF is charging too much? The most obvious cases are when two or more funds offer very similar exposure, but one charges a multiple of the cheapest option. Even when there are bigger differences between two similar funds, it is difficult to justify paying for the more expensive option. Some funds may look distinctive on the surface but just repackage exposures you can get elsewhere more cheaply.

Too Much Risk
It is hard to come back from a large loss. While it’s necessary to take some risk to earn more than the paltry rates Treasuries offer, the riskiest funds rarely offer commensurate compensation. Plus, riskier funds are tough to use well, as the pain of the losses they inflict can cause investors to dump them at the wrong time.

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About Author

Alex Bryan

Alex Bryan  is the Director of Passive Fund Research with Morningstar.

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