AN ETF is called an Exchange-Traded Fund since it’s traded on an exchange just like stocks.
Below are three red flags to avoid the worst ETFs:
1. Inadequate liquidity
Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Low asset levels lead to lower volume and larger bid-ask spreads.
2. High fees
ETF fees should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. Invest in ETFs with total annual costs below 0.46%. The weighted average is lower at 0.15%, which highlights how investors tend to put their money in ETFs with low fees.
3. Poor holdings
Avoiding poor holdings is by far the hardest part of avoid bad ETFs, but it is also the most important because an ETFs performance is determined more by its holdings than its costs. Fees may be cheap but if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].