A few weeks ago, the S&P 500 fell almost 1,000 points and the Nasdaq fell nearly 1,200 points.
That’s because the ETF’s management team didn’t make any trades in the index’s underlying stocks, leaving it with a huge exposure to the broader market.
Investors can buy ETFs and other funds to bet on the direction of the markets.
The problem is that many ETFs use the index to manage their own portfolios and not to invest in the broader markets.
As a result, some investors are taking advantage of the low risk and high reward that come with buying ETFs.
But when it comes to owning ETFs, it’s crucial to know exactly what you’re buying.
You have to buy ETFS, not ETFs that invest in stocks.
Many ETFs offer mutual funds that invest mostly in stocks, but ETFs don’t always invest in other stocks.
ETFs also often don’t offer ETFs with long-term, or long-time-to-date, exposure to stocks.
These ETFs may have a long-running history, but they don’t have enough years of history to give you an accurate picture of how the index is performing.
ETF investors aren’t necessarily invested in stocks directly.
ETF funds don’t invest directly in companies.
Rather, they buy and sell securities and trade them in the markets where those securities are traded.
ETF shares typically have low price-to of return ratios, and investors tend to be willing to pay a premium for those high returns.
ETF stocks are more likely to be traded on secondary exchanges and can be traded in multiple currencies, making them more volatile than other stocks in the market.
ETF management is expensive.
ETF managers must manage all the trades that the ETF is making, so they’re expensive.
The average annual fee for ETFs is about $30, but a few funds can charge more.
For example, the Vanguard SPDR S&p 500 ETF has a 10% fee that some investors will pay, but the Vanguard ETF has about 25% of its assets in the S.P. 500, and it’s expected to hold the rest of its funds in the ETF.
ETF investments aren’t for everyone.
Many ETFs are created to hedge against inflation, which can happen when the value of the stock market rises or falls.
If you buy a stock that is rising, you could lose money if inflation rises.
But ETFs aren’t designed to buy a company or a commodity.
ETF holders are able to invest their money in shares of other companies or assets that are also expected to go up or down in price.
You can’t buy ETF shares with cash.
ETF ETFs hold their money outside the U.S. and aren’t subject to the same federal regulations as stocks.
This means you can’t cash out your ETF shares and sell them at a loss to fund a retirement account.
There’s no limit on how much you can own.
An ETF’s value can grow rapidly as the market moves.
For instance, when the Dow Jones Industrial Average soared more than 20% in the summer of 2014, the fund lost about $1.6 million.
The fund had a $7.8 million balance at the end of 2015.
ETF holdings aren’t backed by a fund manager.
Unlike stock ETFs or mutual funds, ETFs haven’t been designed to be a “safe haven” for investors.
ETF securities are backed by no assets and aren, therefore, subject to a risk of loss, including losses if they fall in value.
The market doesn’t need a fund to protect investors.
If the market falls, investors have to sell their ETF shares, which is expensive and difficult.
ETF portfolios can be risky.
ETF portfolio managers may invest in a fund that’s losing money.
ETF investment managers don’t own the underlying securities, so their investments aren, in fact, “riskier” than those in other investments.
ETF fund managers also typically don’t make regular trades, which means they don the same trades every day.
ETF owners are exposed to the risks of the underlying investments.
If a fund has an extremely high rate of return, investors can lose money and lose their money quickly.
ETF trading platforms aren’t regulated by the SEC.
ETF brokers and exchanges are regulated by other regulators, and ETF trading is typically conducted through brokers.
The SEC regulates broker-dealers.
ETF buying isn’t easy.
To buy an index fund, you’ll need to use a brokerage account.
To get the funds, you need to sign up for an account.
The ETFs must be open for trading, which requires the brokerage account holder to submit annual reports and a quarterly report to the SEC and the broker.
The broker then takes your order