Top 5 ETF Tips

by Carlos Portocarrero on 11 June 2010 8 comments
Photo: Photos8

ETFs and I have had a rocky relationship. It was love at first sight right when we first met, but then time passed and I felt some bitterness towards them — even writing right here on Wise Bread that ETFs sucked.

But Wise Bread readers protested (rightly so) and that led me to rediscover them and their place in this world. You can read those comments here.

It's not them, it's me

Do they suck? If you don’t use them right, then yes. But so does everything else in life.

So without further ado, here are my top five tips to taking full advantage of ETFs and staying “in love” with them.

1. Don’t pay commissions

ETFs trade throughout the day like stocks, and that means you have to pay for them like stocks too. But if you’re adding to your position throughout the year, then these commissions will add up. Check the fine print with your broker to see which funds you have access to that are free of commissions.

2. Watch expense fees

ETFs are hybrids, and the mutual fund-ish part of them requires you to pay expense fees. So mutual fund/index fund rules apply here: be ruthless with funds that charge you too much. Saving on expense fees can add up to a LOT of money over time.

3. Ignore the noise

News will come throughout the day that will cause your ETF to go up or down, just like a stock would. Don’t worry about it. That’s one advantage owning an index fund — you don’t get the intraday fluctuations driving you nuts. Long-term investors need not worry about what happens on an hourly basis.

4. Diversify

It’s a cliché because it’s good advice. Make sure you don’t own five ETFs that are into oil or tech or any other sector.

5. Do NOT become a trader

If you want to play with a small percentage of your portfolio and play Jim Cramer with it, go for it. But don’t do this with too much of your money — it’s a doomed strategy. Yeah you can short, you can place complex options strategies with some ETFs, you can leverage yourself to the hilt, etc. But if you must, keep it to 5% or less of your overall portfolio. Leave the trading to the traders.

I did a lot of digging into Vanguard’s ETF system, and it’s pretty good, especially if you have more than $50,000 in your portfolio. Otherwise I still like the value of their index funds over ETFs. If you have more than $50k, however, you’ll probably save on expense fees with ETFs — they are cheaper than the comparable index funds that are already dirt cheap with Vanguard.

I learned a valuable lesson here: I have a very rocky relationship with ETFs but I should’ve done more digging before I wrote my last article. The comments on there were right and I apologize to anyone who was taken aback by reading the sensationalistic spin I put on that story.

ETFs have a definite place with everyday investors, as long as you're careful and take the necessary precautions.

Can we still be friends?

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Steve

Sure.

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Jeff

I was with everyone else thinking that your last article was sub-par in terms of misinformation, but you've redeemed yourself in my eyes. It takes a lot for someone to admit mistakes publicly. You should be a politician.

Carlos Portocarrero's picture

Thanks Jeff! As for being a politician...I think I'll stick to writing—I don't want the whole world to dislike me!

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Heather

Much better. :) Good tips! And your humility is to be admired.

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Alan

I found that managing my ETFs on the Wikinvest Portfolio very useful. It's free and I highly recommend that you guys check it out. https://www.wikinvest.com/?_acn=portfolio&_acm=competition&_acs=aibrahim

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Guest

I think the most important question a retail investor can ask themselves - and they should do this with every investment - is "Exactly how can this investment return my capital?" With a lot of ETFs - as you've noted - it doesn't make any sense to be a long-term investor. With UNG, for one, being a long term investor doesn't work because you're working against contango prices.

But most investors just see "Oh, this is the United States Natural Gas fund, I'm bullish on natural gas, so I'll buy UNG."

Being right on the trend isn't really that difficult, but it's never enough to be right on the trend - you also have to pick investments that benefit from the trend. You could have been right on the trend of the biggest bull market in stocks between 1981 and 1999, and still gotten wiped out by picking bad investments. ETFs are the same story. If you don't do the work to find out exactly how your capital will come back to you, then you'll probably get wiped out. People have wrongly touted ETFs as easy, no-brainer ways to play the market, and those sentiments should ALWAYS send red-flags to investors, but some people never learn.

Guest's picture

OK, Here's the deal-Do not dollar cost average with ETF's. But if you are investing a lump sum at one time and want a portfolio that is easy to manage with lots of diversity try VEU (all world ex-US) index, VTI(Total US stock market) and a broad based bond etf and over the long term, you will likely do well. And that's LONG term.... more than 5-10 years. Thanks for the post, Barb Friedberg

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John A

Everyone commenting on this article, including the writer, are insane. Since when does the price or fees you pay have ANYTHING whatsoever to do with success in investing or the pursuit of any other financial goal? The whole disucssion is ludicrous and superfluous to the real issue - investor behaviour. Investments don't underperform, people do. Thats my quote - use it if you like.

In the meantime, embrace the wisdom which you all possess. Repeat after me....(please recite in a deadpan montone) ...."There is no free lunch in this world"....."ETF's nor any other fad investment is not the answer to my financial goals" ...."I am the only one in control of my financial outcomes"....."I will stop focussing on meaningless data and facts/figures and not allow the media, or a media shill to manipulate me any further" ......"I will live my financial life in this way to set a good example for my children who rely on me for guidance since the school system will not provide this information"...........................................

There....don't you feel better?