Have you started investing in ETFs? Many people take their first step in investing with ETFs because they are relatively safer and easier to trade than individual stocks.
However, since ETFs are also financial products, thinking "if I just buy any product, it will go up on its own" is very dangerous. By hastily choosing based only on the product name and recent returns, you often face unexpected risks.
Today, we objectively summarize the 7 most common ETF mistakes beginner investors make and how to avoid them.
Mistake 1: Chasing Recent Performance
The most common mistake beginners make is blindly buying the ETF with the highest returns over the past year or three months. However, it is a long-standing truth in investing that 'recent performance does not guarantee future returns.'
If you enter specific industry or thematic ETFs that have surged in returns over a short period too late, there is a high probability that the price is already at a peak, which can lead to large losses when the price falls. Rather than the flashy returns, you must first check what investment targets the ETF puts funds into and which index it tracks.
Mistake 2: Judging the Investment Target Solely by the ETF Name
Just because good words like 'Global', 'Dividend', or 'Growth' are in the name does not necessarily mean it is an excellently diversified product. Even ETFs with similar names can have vastly different contents depending on the tracked index and asset inclusion criteria.
Instead of trusting just the name, you should develop the habit of directly checking the top 10 holdings, country weightings, and industry weightings in the product prospectus or on the asset manager's website.
Mistake 3: Thinking Holding Multiple ETFs Automatically Diversifies Your Portfolio
Many people feel relieved, saying, "I have 5 ETFs, so I am well diversified!" But what if you bought a tech ETF, a large-cap ETF, and a dividend ETF, only to open them and find that all three products hold the same large IT companies in their top weightings?
This is the same as concentrating your assets in a few companies, having only increased the number of products you hold. Rather than simply collecting multiple types of ETFs, the key is to build a portfolio so that the constituent stocks and investment regions do not overlap.
Mistake 4: Judging Costs Based Only on the Expense Ratio
When making mistakes related to costs, investors often judge a product as cheap by looking only at the stated 'total expense ratio'. However, there are other invisible costs hidden in trading and maintaining an ETF.
These include trading commissions paid when buying and selling, implicit costs arising from the bid-ask spread, and currency exchange costs incurred when investing in foreign assets. Even if the expense ratio is low, if the trading volume is too small and liquidity is low, you might actually pay a larger cost during the trading process.
Mistake 5: Always Using Market Orders
The habit of always placing a 'market order' (executing immediately at the currently traded price) when buying can be dangerous. In situations with low trading volume or high market volatility, you might end up buying at a much higher price or selling at a much lower price than expected.
It is easy to incur a loss if you place a market order when the ETF's market price temporarily deviates from its actual value (Net Asset Value, NAV). For beginners, it is safer to utilize a 'limit order', where you clearly specify the price you want. Of course, you must remember that a limit order will not be executed unless it reaches your desired price.
Mistake 6: Holding Leveraged and Inverse ETFs Long-Term Like Regular ETFs
Leveraged ETFs that seek 2x or 3x returns, or inverse ETFs that bet on market declines, are highly complex products that are very difficult for beginners to approach.
The biggest misconception is trying to hold these products long-term like regular stocks. Leveraged and inverse ETFs are generally designed to pursue an objective for a defined period, often 'one day'. If held for a longer period beyond a day, navigating through the volatility of the market going up and down, they will record cumulative returns (sometimes large losses) that are completely different from a simple multiple of the underlying index. If you do not perfectly understand the product structure, it is best to avoid them.
Mistake 7: Not Defining Your Investment Goal and Holding Period
The final mistake is investing without defining the nature of your money. Short-term funds you need to use for a housing deposit in three months and long-term funds for your retirement in 10 years require different investment approaches.
You must choose a product that fits your own goals and risk tolerance level, whether you want to aggressively invest while taking on the currency risks of international ETFs, or receive interest through a bond-type ETF. You must never forget that there is a possibility of principal loss with any ETF.
📋 Pre-Purchase ETF Checklist
Before pressing the buy button, check for yourself if you have verified all the items below.
- [ ] What index does it track?
- [ ] What are the top 10 holdings?
- [ ] Are the country and industry weightings too concentrated in one area?
- [ ] How much are the other costs besides the total expense ratio?
- [ ] Is there enough trading volume and liquidity to buy and sell comfortably?
- [ ] Is the product exposed to currency fluctuations? (Currency-hedged or not)
- [ ] Is it a product with a complex structure, such as leveraged or inverse?
- [ ] Do the holdings overlap with ETFs I already own?
- [ ] Does this product fit my investment goal and expected holding period?
ConclusionConclusion
Successful investing does not begin with finding the 'best ETF' with the highest returns. Rather, avoiding 'dangerous ETFs' that you do not understand comes first. Do not be swayed by flashy product names or sweet recent returns; instead, take your time to examine the basic structure of an ETF, costs, and inherent risks before investing solidly.
※ Disclaimer: This article is for educational purposes to help understand financial products and investing. It does not recommend the purchase or sale of any specific ETF product, and all investment decisions and the resulting responsibilities lie solely with the investor.
Frequently Asked Questions (FAQ)
Q1. If I hold a 2x leveraged ETF for a year, will I earn exactly twice the index's return?
A1. No. Leveraged ETFs typically seek twice the index's return for 'a single day'. In a volatile market where prices go up and down, holding them long-term can result in returns vastly different from twice the index return due to compounding effects, and you could even incur a loss.
Q2. Is a limit order better than a market order when trading ETFs?
A2. We cannot say one is unconditionally better, but for beginners, a limit order—where you set the price you want—is relatively safer as it prevents execution at an unexpectedly high price. However, a limit order might not be executed if the specified price is never reached.
Q3. How can I check if my ETF portfolio is well-diversified?
A3. If you hold multiple ETFs, open the Portfolio Depositary File (PDF) provided on each asset manager's website and compare the top holdings. If the top holdings overlap even among ETFs with different names, you have not achieved true diversification.