Exchange-traded funds or ETFs are baskets of securities which trade on stocks, bonds, commodities, currencies, and precious metals. They are ideal for maintaining flexible, low-cost and tax-efficient portfolios. They do carry their own risks as other investment products. Here are a few points that show you how to buy ETF funds and make profits.
Watch your Trading costs
It might be inexpensive to own ETFs, but trading them could cost you if you are not careful. You would have to buy or sell ETFs through a broker unlike mutual funds where you can buy directly from a mutual funds company. The fee per transaction can sometimes nullify the cost benefits of ETFs, especially when you are trading in small amounts.
Beware of Discount Brokerages
Some brokerages might undercut other rivals to provide a purchase fee of around $4 for your ETF. However, these programs would allow you to buy and sell only during certain times of the day. But when you consider the fact that one of the main advantages of ETFs is that you can trade at anytime of the day, you will realize that discount brokerages may not be an attractive option.
Avoid the temptation to trade
Since ETFs can be bought and sold at anytime of the day, inexperienced traders might be tempted to trade often without taking the time to evaluate their decisions. Studies have shown that improper stock timing is one of the biggest errors committed by individual investors.
Using Rear-view-mirror investing
Many investors go after ETFs that have gone high recently. However, most of them end up buying high and selling low. This is a kind of knee-jerk reaction that inexperienced investors have towards ETFs that have gone high. Moreover, going after ETFs that have performed well in the past is no guarantee for success.
Beware of New Strategies
Fundamental portfolios are the new trend in the ETF business. Instead of using market capitalization, this strategy involves weighting stocks based on factors like dividends and earnings which are specific to a particular company.
People who follow this strategy claim that it delivers better performance in the long run. But the higher trading activity and the associated fees can undermine the very advantages of ETFs. Therefore, investors need to understand each strategy before they begin to implement them in their trading.
These are some of the practices that can help you avoid the most common pitfalls while buying ETFs.What other pitfalls are you aware of and how do you mitigate them?