ETF Facts and Misconceptions

ETFs have received a lot of attention in recent years particularly given the irrational market environment we’ve come through and the impact that has had on the results of active money managers.

For example, over the past few years studies have shown that only a small number of actively managed funds beat their respective indexes which has proliferated the interest in ETFs, most of which use a passive index-tracking strategy. According to Investment Executive, over the past five years ETFs have grown at an annual rate of close to 30% versus about 6% for mutual funds.

ETFs are legitimate products and they can play a fantastic role in investor portfolios. But the way ETFs are understood by many investors seems to be based on a few faulty assumptions.

Common Assumptions About ETFs

  1. All investors should focus on how their investments are performing relative to an index. But if you use an investment strategy you’re comfortable with and generate a good level of return with a reasonable level of risk (and ultimately reach your investment goals by doing so), then perhaps the return of an index is not so important.
  2. Everyone is a do-it-yourself investor. ETF fees don’t include the cost of the professional advice and guidance that most investors need to navigate the financial world as they go through the different stages of life.
  3. All ETFs share qualities like low fees. In reality, though, ETFs can differ dramatically in cost. And often, there are additional costs to consider, among them brokerage commissions since ETFs are bought and sold on the stock market, through stockbrokers.

The needs of most long-term investors reading this site can be well served through a diverse group of high quality dividend growth stocks. However, some folks are passionate about ETFs, and those folks can benefit from some clarification.

ETFs can be great tools when they are understood and used correctly in a portfolio. In fact, there are some fantastic dividend ETFs that can provide investors with smaller portfolios a good diversification while they are raising funds to purchase individual stocks.  Dividend ETFs specific to different countries or markets can be a great way to get exposure to markets in which you are not yet comfortable purchasing individual stocks.  Those searching for yield may look to high yield ETFs to diversify risk while still maintaining an above average yield within their portfolio.  

Even using them  as points of research to see which stocks they are holding makes Dividend ETFs, in and of themselves, worth something.

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