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Althea Spinozzi
Head of Fixed Income Strategy
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Busting the five myths of ETFs
ETFs
iShares
Summary: When things are hyped like ETFs have in recent years, there are often misunderstandings and a few false truths. Let’s be clear on what ETFs really are and what they are not.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
Let’s be clear on what ETFs really are and what they are not.
Myth 1: ETFs are volatile because they are traded throughout the day
Reality: ETF prices are visible but that doesn’t make them more volatile than mutual funds.
The changing price of an ETF reflects the changing value of its underlying securities and the supply and demand of the ETF in the marketplace. The difference between an ETF and a mutual fund is that the price of a mutual fund, which similarly reflects the value of its underlying securities, is fixed once a day and only after the market closes, while ETF pricing changes throughout the day in real time. This doesn’t mean that ETFs are more volatile – their price changes are just more visible.
Myth 2: ETFs are inherently risky
Reality: Risk is driven by the assets you're investing in, not necessarily the vehicle used to access the assets.Just like a mutual fund, the risk profile of an ETF is tied to its underlying holdings, or the assets it invests in: so a managed fund and ETF that hold similar stocks or bonds will have similar risk profiles. For example, an international stock ETF or managed fund may have higher risks than a U.S. investment grade corporate bond ETF. But that risk is not related to whether you choose to hold a managed fund or an ETF.
On the flip side, an ETF offers greater diversification than an individual stock, which may help reduce risk in a portfolio
Diversification and asset allocation may not fully protect you from market risk.
Myth 3: ETFs only apply if you’re investing in a very specific piece of the market.
Reality: You can use ETFs for a wide range of exposures and outcomes.ETFs come in virtually many “flavors” They offer low-cost access to specific markets (e.g., a country or industry), and to broad exposures (e.g., the Hang Seng, Millie Barrows, Straits Times Index or the U.S. bond market) because there is lower fee for the management of passive ETFs. This, combined with the ease and speed with which they can usually be bought and sold, means that investors can access investments that may otherwise be out of reach.
So whether it’s hard-to-access foreign markets, core building blocks for your portfolio, or funds that target specific outcomes, there’s an ETF that may help.Myth 4: ETFs aren’t for income investors since they don’t pay dividends.
Reality: ETFs offer a diverse set of solutions for investors looking for income.
The hunt for income in the fluctuating interest rate environment can be challenging. But whether it’s through dividend-paying stocks or fixed income exposures, ETFs offer investors a broad range of opportunities to potentially generate income. And with ETFs, you get the added benefit of greater diversification than an individual stock or bond.
Myth 5: ETFs are just for day traders
Reality: ETFs are effective investment tools for many types of investors
Because ETFs have the same trading flexibility as stocks, short-term traders can use ETFs to quickly move in and out of a position. But ETFs are also a cost-efficient way to build a long-term, core portfolio. Most ETFs have attractively low expenses compared to actively managed mutual funds and, to a lesser extent, passively managed index mutual funds1.
Resources
- 26.04.2023: https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp
Points to takeaway
Now that you’ve got the ETF basics, here’s a recap of what you should keep in mind:
- ETFs are simple, low cost, transparent, and also offer diversity and flexibility
- ETFs offer the best of managed funds and individual stocks
- ETFs can meet the needs of income investors, day traders, in fact all types of investors
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