ETF Investment Strategy: 5 Mistakes You Might be Making
Exchange-traded funds (ETFs): Depending on your financial goals and investing strategy, ETFs might be a positive addition to your portfolio. But do you know why traders might build an ETF investment strategy?
ETF investing can help both new and experienced investors build a diversified portfolio. Because they’re traded on an exchange, it’s easy to include ETFs in your trading strategy. Plus, unlike stocks, ETFs hold multiple underlying assets, making them a popular pick for traders looking for more diversification.
If you are considering incorporating them in your trading journey, here are five stumbling blocks you need to know about when it comes to investing in ETFs and ways to help avoid the pitfalls.
Key takeaways:
Research the different ETF types and how they operate in order to more effectively include them in your trading strategy.
Don’t let popularity or emotional responses impact your ETF trading decisions.
Actively monitor your trades and evolve your trading strategy to help keep costs in check, avoid buying what you don’t really want, and manage the risk of overspending or holding on to stocks that don’t help you.
What is an ETF?
An ETF is a financial instrument that operates much like a mutual fund, but with the key distinction of being traded like a stock. These funds track several underlying assets, including anything from stocks and bonds to specific investment strategies.
With so many options for tracked assets, an ETF can capitalize on various asset classes and add a lot of diversity to a trader’s portfolio. And can provide a trader with these benefits without taking significantly more time to manage and allocate investments.
ETFs can also make an accessible, cost-effective approach for beginner traders to enter the market with their often-low entry costs and high liquidity.
Unfortunately, there’s no quick or easy way to find a “unicorn” ETF that meets all your needs. And there are several mistakes you might be guilty of when it comes to ETF trading.
Mistake #1 - Jumping on the bandwagon
ETFs have rapidly gained popularity in recent years, and when a hot-ticket fund is blowing up the headlines, it can be really tempting to try and stake a claim before it’s too late or get out while the going is good.
But remember: research is your friend.
Keep your investment objective in mind and find ETFs that meet your bottom line with asset classes that fit your strategy. Be objective and not reactive. Keep your emotions in check so you stay on track and don’t jump the gun when buying or selling.
Not all ETFs are created equal and some quickly fall from public favor. For example, SPAC ETFs boomed in 2020 and were promoted by popular investors. But they quickly fell in 2021, and two large funds even closed in 2022 after only trading for two years.(1)
Mistake #2 - Buying products you don’t fully understand
Sometimes there’s nothing as painful as buyer’s remorse. Maybe you bought a phone that sounded nice but didn’t really have all the features you want. Or maybe you spent too much on a laptop with computing power that you don’t need and will never use. Either way, it’s a rough realization.
The same goes with ETFs. To avoid that buyers remorse, you need to ask yourself questions, including the following, before you dive in:
Does the ETF operate how you think it does?
Different ETFs can behave in dramatically different patterns, depending on the underlying assets and how they were designed.
For example, short ETFs are sometimes notorious since they’re meant for trading based on short-term market movements. They don’t deliver on the positive returns during a long decline as some novice traders might expect. If you aren’t in the know, you could be left holding the bag when the funds fail to perform as you thought they would.
Does the type of ETF meet your needs?
You’ll first need to understand the difference between different types of ETFs, which cover a wide range, including:
Passive and active ETFs
Stock ETFs
Bond ETFs
Sector and industry ETFs
Commodity ETFs
Currency ETFs
Inverse ETFs
Leveraged ETFs
Take time to evaluate what you’re getting into. For example, if you’re interested in bond ETFs, do your research. Find out if monthly interest and other advantages balance the cons of high expense ratios and possible low returns.
Make sure the ETF[AS4] you want to trade and its unique pros and cons works with your short-term and long-term strategies.
Mistake #3 - Only using market orders
When you place a market order, you’re telling the exchange that you want to buy that ETF as soon as possible, at any price. (And relying on technology to meet the current best price can sometimes be dangerous for your wallet.)
You don’t know what price you’re going to pay before you pay it and the market can change very quickly. Market orders offer no protection in violent market shifts caused by political or economic turmoil. The price could be far higher than the ETF is worth.
Pro tip: Limit orders provide more control
Because you can choose how much you’re actually willing to spend on a fund, limit orders can help you better control your ETF trades.
Instead of prioritizing the timing, these orders give price the ultimate say in whether or not your order is executed. While the trade may not be filled if the price requirements are not met, you can avoid paying more than you are comfortable with.
Mistake #4 - Letting small costs add up
It’s not just the cost of the ETF you need to consider: it’s the cost of trading itself. So do yourself a favor and never ignore commissions and fees.
Even small percentage differences can negatively impact returns over time. Higher fees on your funds, broker, and every trade add up and leave opportunities on the table by cutting your capital and gains.
Check the cost of your chosen funds. Some funds like actively managed ETFs have higher fees that you need to keep an eye out for.
You should also look at how often you’re trading. Buying or selling frequently can make fees add up faster, cutting down on potential profit. So it’s a good idea to find a broker that offers commission-free trading on ETFs to cut down on unnecessary costs.
Mistake #5 - Assuming that the more you invest, the better off you'll be
More investments do not guarantee more gains. It just means you have more capital invested and potential risks to face.
Don’t be afraid to curate your portfolio to avoid risks like:
Failing to spot underperforming ETFs
Overlapping investments
Over-exposure to risks in certain sectors
Being spread too thin and missing out on new potential opportunities
Once you have an ETF in your portfolio, keep track of it. Monitor if it behaves like you expected, how it compares to others you trade, and if it still fits with your long-term strategy.
Ask yourself: Will the underlying assets properly diversify your portfolio? Or will you end up with too much exposure to the risks of a particular holding.
ETF investing relies on a well planned trade management strategy just as much as other financial instruments.
Trade ETFs with moomoo
Once you've created the groundwork for your ETF investment strategy and are ready to start implementing it, you will need to find the right trading platform. With a host of advanced tools and user benefits, moomoo offers pro-level features for your ETF trading.
Find new opportunities with our customizable stock screener that lets you filter to find the ETFs that fit your unique goals and strategy.
Build your expertise and confidence with paper trading.
Use watchlists to keep track of ETFs you’re interested in and set up alerts to be notified about price changes.
Double check your decisions, analyze price trends, and more with in-app trend projections and analyses.
Enjoy commission-free trading on US ETFs*.
Plus, with over 100 technical indicators and drawing tools, real-time data, global trading news, and company updates, you can research, analyze, and monitor your investments before, during, and after your trade.
Don’t let a subpar broker and trading platform hold you back. Download moomoo today.
Sources:
*Commission-free trading is for US residents trading stocks, ETFs and options in the US market. Other fees may apply. For more information, visit moomoo.com/us/pricing.
Important Information: Before investing in an ETF, you should read both its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objective, principal investment strategies, risks, costs, and historical performance (if any). You can find prospectuses on the websites of the financial firms that sponsor a particular ETF, as well as through your broker. A Word About Risk: Investment returns will fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. ETFs are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, international securities, commodities, fixed income, and more. An ETF may trade at a premium or discount to its net asset value (NAV). Diversification is an investment strategy that can help manage risk within your portfolio, but it does not guarantee profits or protect against loss in declining markets.
This blog is provided is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal.
Moomoo is a financial information and trading app offered by Moomoo Technologies Inc. Securities are offered through Moomoo Financial Inc., Member FINRA/SIPC.