Top 5 ETF Tips

Carlos Portocarrero — Fri, 11 Jun 2010 12:00:04 +0000

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?