What Are Some Myths Surrounding ETFs?

By dispelling these myths about ETFs, investors can gain a clearer understanding of the benefits and risks associated with these investment vehicles. It’s essential to approach ETF investing with accurate information and to consider individual investment objectives, risk tolerance, and preferences when making investment decisions.

Myth #1: ETFs only track traditional market-weighted indexes like the S&P 500.

Reality: Smart Beta ETFs offer strategies targeting higher returns or reduced risk, similar to some actively managed funds. ETFs cover various sectors, regions, fixed-income markets, and more.

Myth #2: ETFs pose liquidity risks to the market.

Reality: ETFs generally have better liquidity than mutual funds. Liquidity varies depending on ETF composition. Stock-based ETFs tend to be more liquid than those investing in alternatives.

Myth #3: All ETFs are based on passive strategies.

Reality: While ETFs started passively, actively managed ETFs are now available, offering strategies across equity and fixed-income classes. Actively managed ETF assets have notably increased.

Myth #4: Passive ETFs are safer than active ETFs.

Reality: Risk depends on underlying investments, not management style. Active managers research and anticipate risks. Passive ETFs track index holdings, missing active managers’ risk assessment.

Myth #5: Active managers can’t outperform index funds or passive ETFs.

Reality: Some active managers do outperform their benchmarks. Global resources and research platforms, along with economies of scale, aid active managers in managing fees and enhancing gains.

Myth #6: ETFs are only for short-term trading and market timing.

Reality: ETFs, traded throughout the day, can serve long-term investment horizons efficiently. Lower operational costs make them cost-effective for maintaining strategies over time.

Myth #7: ETFs should have full daily transparency of their underlying holdings.

Reality: Full daily transparency was once crucial but not essential now. ETFs can operate efficiently with trading confidentiality to prevent the detrimental use of information.

Myth #8: ETFs with low daily trading volume are not liquid.

Reality: ETF liquidity isn’t solely dependent on daily trading volume. Underlying holdings’ liquidity is crucial; ETFs with liquid holdings remain liquid.

Myth #9: ETFs are volatile because they are traded throughout the day.

Reality: ETFs’ transparent pricing doesn’t inherently make them more volatile. Their price changes reflect underlying securities’ value changes.

Myth #10: ETFs are inherently risky.

Reality: Risk is tied to underlying investments, not ETF structure. Diversification in ETFs can help reduce risk in portfolios.

Myth #11: ETFs only apply if you’re investing in a very specific piece of the market.

Reality: ETFs offer a wide range of exposures, from specific markets to broad indices, making them versatile investment tools.

Myth #12: ETFs aren’t for income investors since they don’t pay dividends.

Reality: ETFs provide diverse solutions for income, including dividend-paying stocks and fixed-income exposures.

Myth #13: ETFs are just for day traders.

Reality: ETFs are effective for both short-term traders and long-term investors, offering flexibility and cost efficiency.

Myth #14: All ETFs have low expense ratios.

Reality: Not all ETFs have the lowest fees. Some equity ETFs have higher expense ratios than certain equity mutual funds.

Myth #15: ETFs only track broad market indexes.

Reality: ETFs capture niche market performance, sectors, sub-sectors, growth or income objectives, and various trading strategies.

These misconceptions can hinder investors from fully benefiting from the versatility and potential of ETFs. Understanding the truth behind these myths is crucial for making informed investment decisions.