To achieve the greatest benefits for their clients, the investment advisors of the 6th Avenue Team at Ingalls & Snyder, LLC begin every client relationship with an in-depth analysis of each investor’s financial wherewithal, risk tolerance, and asset management objectives. 6th Avenue then use that analysis to craft an individualized investment strategy that can avoid missteps that investors might make, including these top five ETF mistakes.
Incorrect Tax Efficiency Assumptions
Non-Diversification of Holdings
The diversity of an investment portfolio helps to protect ETF investors from events that have a greater effect on the values of certain classes of assets or industry sectors over others. Two different ETFs might hold very similar assets, regardless of their defined investment goals. To develop a properly balanced and diverse portfolio with ETFs, the investor should examine the specific products and assets that each ETF will hold.
Improper Understanding of and Mismatches with an ETF's Strategy
Some ETFs are designed to do little more than track a particular market index, while others adopt more sophisticated strategies that involve leverage or daily rebalancing. An investor should not only understand the ETF’s underlying investment strategy, but he or she should also understand how that strategy coincides with the investor’s own portfolio goals.
Inattention to Fund and Asset Liquidity and Trading Volume
ETFs with heavier trading volumes will generally have a smaller spread between their bid and asking prices than lightly-traded ETFs. This might sway an investor into more popular ETF products, but it can also cause the investor to miss potential opportunities. An investor will likely overpay when placing a market order on lightly-traded ETFs, but the investor who places a targeted price order on that ETF may be able to realize substantial gains. This may not be appropriate for an investor whose portfolio is built upon a buy-and-hold philosophy, but it can be an alternative worthy of consideration for a more aggressive investor.
Disparities Between Net Asset Value and ETF Price
The majority of ETFs trade at or very close to a price that matches the net values of their underlying assets. Under certain circumstances, however, an ETF might trade at a premium or discount to those underlying values. An investor can avoid ETF mistakes by reviewing whether and under what circumstances the ETF’s price skews away from underlying asset prices. This will help investors avoid overpaying for an ETF that is trading at a premium, while providing an opportunity for investors to take advantage of discounts.
ETFs are never static investment products. They evolve with changing market conditions, and avoiding ETF mistakes requires vigilance.
The the 6th Avenue Team offer that vigilance and more to each of our clients. We canvass the entire market for investment vehicles that match our clients’ goals and needs, including, where appropriate, ETF investments, and we follow those products to eliminate all mistakes that might work contrary to the client’s objectives.
For more information about our philosophy on how to avoid ETF mistakes, please call our offices in midtown Manhattan to schedule an appointment with one of our account executives.
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