Exchange-Traded Funds (ETFs) have become very popular among investors over the past decade. Here's 10 ETF mistakes to avoid for beginner investors!

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UNDERSTANDING:
Too many investors throw money at the stock market without understanding what it is they're investing in. The same applies to ETFs. I regularly see investors get confused when talking about ETFs, Mutual Funds and Index Funds. Oftentimes these terms are used interchangeably, but to do so is a mistake! An ETF is an investment fund which is traded on the stock exchange. Mutual Funds are bought and sold directly through the investment manager who provides the fund. Index Funds are a type of ETF or Mutual Fund. These funds are great for diversification (i.e. S&P 500 index funds), however understanding the differences is crucial!

HOLDINGS:
There are over 8,000 ETFs available globally. It would be foolish to think that all ETFs are made equal. ETFs can invest in stocks, bonds, commodities, cryptocurrencies and fiat currencies. Even within stock ETFs, there are huge differences between funds. Some stock ETFs (i.e. ARK Innovation ETF) offer low quality diversification due to the nature of the underlying investments. Whereas an ETF like the Vanguard S&P 500 ETF will provide you with diversified exposure to the most established companies in the United States. Bottom line, know what you ETF owns.

WEIGHTS:
Yes, your ETF may invest in over 500 companies. However, the level of exposure to each company within the ETF is not equal (in most cases). The top 10 companies in the S&P 500 account for 30% of the value of the index (and subsequently the index funds). Therefore, the performance of the ETF will be heavily reliant on the performance of those 10 companies. Always check to see who the big players are within your ETF.

STRUCTURE:
ETFs are generally structured as either physical ETFs or synthetic ETFs. Physical ETFs own the underlying investments whereas synthetic ETFs use financial derivatives (called 'swaps') to artificially replicate ownership of the underlying investments. The latter comes with an additional risk to investors known as counterparty risk. Additionally, some ETFs are structured as leveraged ETFs. Leverage is responsible for the 'lambos or food stamps' mentality which you'd see over on the Wall Street Bets subreddit. Leverage in investing refers to the use of borrowed money (or financial derivatives like 'options') to amplify the performance of the investment (for better or worse). Proceed with caution.

EXPENSE RATIO:
The total expense ratio (TER), sometimes referred to as the management expense ratio (MER) or ongoing fund charge (OFC), is perhaps the most important metric to look at on the fact sheet of an ETF. This is how much it will cost YOU, the investor, to own the fund. ETFs are, for all intents and purposes, companies - and companies have expenses. ETF expenses reduce the value of your investment. Shop around to find the best deal.

DIVIDEND STATUS:
Remember, the ETF owns the investments and you own the ETF. Therefore, the ETF will be entitled to receive a dividend should the underlying companies pay a dividend. For dividend purposes there are two types of ETFs - accumulating ETFs and distributing ETFs. Accumulating ETFs will reinvest the dividends it receives back into the fund.. Distributing ETFs will pay out the dividend to your brokerage account.

BROKERAGES:
Don't spend more money on broker commissions than you need to. Check out DEGIRO and BUX Zero (above) for commission free ETFs.

0:00 Introduction
1:17 Understanding
3:15 Holdings
5:59 Weighting
6:59 Interlude
7:37 Structure
9:33 Expense Ratio
12:58 Dividend Status
14:11 Taxation
15:02 Brokerages
16:07 Liquidity
18:05 Circumstances
19:13 Conclusion

*Malone Financial is affiliated with the aforementioned companies. Malone Financial receives a commission for any customer conversions realized via the affiliate links. This video includes my own opinions (which do not reflect the opinions of said companies). Investing involves a risk of loss. Nothing mentioned in this video should be construed as financial advice.

#etfs #etf #indexfunds