Investing in ETFs does not have to be complicated, but there are some pitfalls. This moneyland.ch guide explains common mistakes to avoid when investing in ETFs.
Exchange-traded funds (ETFs) have long been the go-to product for cheap, long-term investing. But there are a few pitfalls you should be sure to avoid if you want your investment to be a success. This moneyland.ch guide lists the most important ETF investment mistakes.
1. Too little diversification
It is certainly possible to build a diversified investment portfolio using ETFs. But just using an ETF does not automatically mean that your investment is well diversified. Each ETF is different, and only using the right one will give you the diversification you need.
Investing in an ETF that tracks just one or several national stock indexes, for example, is not advisable. It is normally better to spread out your investments across the world, as is possible with an ETF that tracks a global stock market index. ETFs that track an entire continent, such as the European or Asian stock markets, can also make sense.
2. Using an expensive ETF
High fees detract from your returns, so it is very important to choose an ETF that has low ongoing costs. The fees charged by the fund, which are normally deducted directly from the fund’s capital, are typically referred to as the total expense ratio (TER).
Depending on which index you want to invest in, you can often choose between many different ETFs for the same index. That allows you to compare the TERs of the different relevant ETFs and use the cheapest one. The moneyland.ch investment guides generally list multiple ETFs for a given asset.
3. Using an expensive stockbroker
The costs of investing are not limited to the fees charged by the ETF itself. The fees charged by the stockbroker that you use to buy, hold, and sell ETF shares also play a major role. When you buy and sell ETF shares, your stockbroker charges you brokerage fees. Additionally, your stockbroker may also charge custody fees or inactivity fees. These fees negatively impact your investment returns.
There are huge differences between the fees charged by different stockbrokers, so it is always advisable to get an overview of costs across multiple stockbrokers. The interactive online trading comparison on moneyland.ch makes it easy to find the cheapest stockbroker for your needs.
Apart from conventional stockbrokers, it is also possible to invest in ETFs using certain neobanks like Neon and Yuh. It is important to note though, that these neobanks only offer a limited selection of ETFs.
The moneyland.ch checklist for choosing the right ETFs
The number of different ETFs available to investors is staggering, which can make finding the right ETF difficult. The moneyland.ch checklist for choosing the right ETF offers a step-by-step list of points to consider in order to find the right ETF for your needs.
4. Using only investment theme ETFs
ETFs that invest based on specific investment themes – such as wide-moat ETFs, momentum ETFs, and future food ETFs – can be an interesting addition to your investment portfolio. These theme-based ETFs can be particularly appealing during times when the given investment theme happens to be trendy. But the problem with these ETFs is that the trend may have already changed by the time the ETF become available. In this case, the optimal time to invest may already be long over.
It generally is not advisable to invest solely in theme ETFs because by concentrating your investment in narrow investment themes, you can end up with a poorly-diversified portfolio. If you want to minimize risk, you should use ETFs that spread your capital out across many different regions and industry sectors, as is possible with global stock indexes. Investment theme ETFs could be used as the extension or “satellite” in a core-satellite portfolio, for example.
5. Not giving your investments enough time
Successfully investing with a well-diversified ETF requires a long investment term. You have to count on the value of your investment fluctuating heavily and even declining over shorter terms. Although there is always a risk of loss, the risk is much lower when you hold your ETF shares over a longer period.
If you will need your money in the foreseeable future, then investing it in an ETF is not advisable. The reason is that if you happen to need the money at a time when markets are performing poorly, you may be forced to sell your ETF shares at a loss. If you have money that you want to invest for a short term, using interest-based investment vehicles like savings accounts and medium-term notes is generally a better choice.
Does using an ETF make sense for your investment?
ETFs are a convenient and often cost-efficient investment solution. But they are not always the right fit. Depending on the investment term, asset class, and index, it can be cheaper to invest in the assets directly yourself, rather than indirectly through an ETF. That could be the case, for example, with investments in gold and silver, or with stock indexes that only track a handful of different stocks. The reason is that you have to pay ongoing fees to use an ETF. These fees are shown as the TER. For long-term investments in particular, the ongoing fees can add up to a substantial investment cost.
When comparing the costs of investing directly versus using an ETF, it is important to account for the services that ETFs may provide in exchange for the ongoing fees. For example, ETFs handle the ongoing rebalancing of your portfolio to match any changes in the underlying index. When you invest in precious metal indirectly using ETFs, you do not have any costs for storage or insurance.
6. Buying and selling too frequently
The investment proverb that jumping back and forth between investments drains your pockets, as accredited to financial expert André Kostolany, is very fitting for ETF investments. Constantly buying and selling ETF shares on a whim is more impulsive than rational. When the value of your investment goes down, it is generally better to keep calm and leave your portfolio alone. If you have a diversified portfolio and a long investment horizon, there is no reason to worry about intermittent turbulence in the markets.
Frequent buying and selling generates high investment costs that negatively affect your returns. Unless you do day trading as a hobby, it is beneficial to keep buy and sell transactions to an absolute minimum.
Disclaimer: This article is provided for informational purposes only, and should not be considered investment advice. The publisher does not accept any liability in relation to this publication.
More information:
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