Common mistakes in buying ETFs

Watch out for these common mistakes investors make when buying exchange-traded funds (ETFs) :

  • Not fully understanding the index the ETF is based on. Look at the fund's stated strategy and holdings, not just the name, because many ETFs hold investments you might not initially expect.
  • Not factoring broker commissions into an ETF's overall costs, especially for frequent incremental purchases over time (e.g. dollar cost averaging).
  • Not realizing that some sector and specialty ETFs are highly concentrated in just a few stocks, or that they use leverage or short strategies, and are therefore much riskier than broader market index ETFs.
  • Not checking the ETF's annual management fee. Although most ETF management fees are low, some sponsors have begun to introduce higher fees, especially on specialized ETFs.
  • Chasing past performance.