forbes.com
Three Red Flags to Avoid Poorly Performing ETFs
This article identifies three key factors—liquidity, fees, and holdings—to avoid poorly performing ETFs, emphasizing that the quality of underlying assets is more crucial than low fees for long-term success.
- How do the fees and quality of holdings of an ETF impact its overall performance?
- The article highlights three critical factors for evaluating ETFs: liquidity (assets under \$100 million are flagged as insufficient), fees (above 0.53% total annual cost is considered high), and holdings (poorly performing underlying stocks negatively impact ETF performance, regardless of fees).
- What are the three most important factors to consider when selecting an ETF to mitigate potential losses?
- Many ETFs exist due to their profitability for Wall Street firms, leading to continuous product creation. Investors can avoid underperforming ETFs by focusing on three key metrics: liquidity, fees, and portfolio holdings.
- What are the long-term implications of solely focusing on low ETF fees without considering the underlying assets' quality?
- Future ETF investors should prioritize due diligence, analyzing holdings' quality as the most crucial factor impacting performance. While low fees and sufficient liquidity are beneficial, the quality of underlying assets is paramount for overall ETF success. Ignoring this aspect can lead to poor returns, despite seemingly attractive fees and high liquidity.
Cognitive Concepts
Framing Bias
The article frames the discussion around identifying "red flags" to avoid bad ETFs. This framing, while helpful for readers seeking to avoid poor investments, might create a negative bias towards ETFs generally. A more neutral framing might focus on how to identify high-quality ETFs.
Language Bias
The language used is generally neutral, although terms like "worst ETFs" and "poor holdings" carry negative connotations. Using more neutral terms, such as "low-performing ETFs" and "underperforming holdings," would mitigate this bias.
Bias by Omission
The analysis focuses heavily on liquidity, fees, and holdings, potentially omitting other relevant factors influencing ETF performance, such as management expertise or market conditions. While acknowledging limitations of space, a broader discussion of risk factors beyond these three would provide a more comprehensive picture.
False Dichotomy
The article presents a somewhat false dichotomy by emphasizing that the quality of holdings matters more than management fees. While this is an important factor, it doesn't negate the significance of fees, especially over long-term investment horizons. A balanced approach would acknowledge the importance of both.
Sustainable Development Goals
The article emphasizes the importance of choosing ETFs with low fees to avoid disproportionately impacting lower-income investors who may be more sensitive to high costs. By highlighting the significant differences in fees between various ETFs (e.g., comparing InfraCap MLP ETF with Schwab U.S. REIT ETF), the article promotes financial inclusion and reduces inequality by enabling investors to make more informed decisions.