Passively managed Exchange Traded Funds (ETFs) are a popular, low-cost, way to invest. The growing conventional wisdom is that they are a far better option than high-cost actively managed funds which tend to underperform anyway. In fact, over the last 12 months investors have pulled more than $175 billion out of active funds, and they’ve added close to $435 billion to passive funds.
For reference, actively managed funds (such as mutual funds) are those that rely on professional stock pickers to try to pick stocks that will outperform a benchmark (such as the S&P 500), whereas passive funds (such as ETFs) simply buy everything in the benchmark and end up closely matching the benchmark’s performance (generally speaking).
Recent data from Morningstar shows that over the last 10 years, 73% of actively managed funds have underperformed their benchmark (this is a very bad thing considering active fund managers are generally paid very high fees because they’re supposed to outperform their benchmark). However, before you go dumping your hard-earned savings into ETFs, here are the top ten ETF mistakes and misconceptions we come across that you may want to consider…
