Avoiding the Top 5 ETF Mistakes

One of the biggest mistakes that any investor makes is to choose an investment vehicle, such as an ETF, apart from a cohesive plan or purpose. That investor might realize some benefits from the investment, but he or she could potentially derive far greater benefits if the choice was made as part of a comprehensive investment strategy.

To achieve the greatest benefits for their clients, the investment advisors of the 6^th Avenue Team at Ingalls & Snyder, LLC begin every client relationship with an in-depth analysis of each investor’s financial wherewithal, risk tolerance, and asset management objectives. 6th Avenue  then use that analysis to craft an individualized investment strategy that can avoid missteps that investors might make, including these top five ETF mistakes.

Incorrect Tax Efficiency Assumptions

An ETF can be a more tax-efficient investment vehicle than a mutual fund if the ETF does not routinely sell its holdings. Sales of underlying holdings can generate capital gains, and fund owners will face tax bills when those gains are distributed to them. If tax efficiency is a component of an investment strategy, the investor should take greater care to select an ETF that does not frequently trade or turn over its underlying assets. Almost 2,000 different ETFS are available in domestic markets and more than 5,000 ETFs are traded globally. An experienced investment advisor will be able to select multiple different tax efficient options from that pool of ETFs.

Non-Diversification of Holdings

The diversity of an investment portfolio helps to protect ETF investors from events that have a greater effect on the values of certain classes of assets or industry sectors over others. Two different ETFs might hold very similar assets, regardless of their defined investment goals. To develop a properly balanced and diverse portfolio with ETFs, the investor should examine the specific products and assets that each ETF will hold.

Improper Understanding of and Mismatches with an ETF's Strategy

Some ETFs are designed to do little more than track a particular market index, while others adopt more sophisticated strategies that involve leverage or daily rebalancing. An investor should not only understand the ETF’s underlying investment strategy, but he or she should also understand how that strategy coincides with the investor’s own portfolio goals.

Inattention to Fund and Asset Liquidity and Trading Volume

ETFs with heavier trading volumes will generally have a smaller spread between their bid and asking prices than lightly-traded ETFs. This might sway an investor into more popular ETF products, but it can also cause the investor to miss potential opportunities. An investor will likely overpay when placing a market order on lightly-traded ETFs, but the investor who places a targeted price order on that ETF may be able to realize substantial gains. This may not be appropriate for an investor whose portfolio is built upon a buy-and-hold philosophy, but it can be an alternative worthy of consideration for a more aggressive investor.

Disparities Between Net Asset Value and ETF Price

The majority of ETFs trade at or very close to a price that matches the net values of their underlying assets.  Under certain circumstances, however, an ETF might trade at a premium or discount to those underlying values. An investor can avoid ETF mistakes by reviewing whether and under what circumstances the ETF’s price skews away from underlying asset prices. This will help investors avoid overpaying for an ETF that is trading at a premium, while providing an opportunity for investors to take advantage of discounts.    

The 6th Avenue Team's Approach to Avoiding ETF Mistakes

ETFs are never static investment products. They evolve with changing market conditions, and avoiding ETF mistakes requires vigilance.

The the 6^th Avenue Team  offer that vigilance and more to each of our clients. We canvass the entire market for investment vehicles that match our clients’ goals and needs, including, where appropriate, ETF investments, and we follow those products to eliminate all mistakes that might work contrary to the client’s objectives.

For more information about our philosophy on how to avoid ETF mistakes, please call our offices in midtown Manhattan to schedule an appointment with one of our account executives.