As the world of exchange traded funds (ETFs) expands, more products become available, but not all of them are as simple as you'd think. ETFs are becoming more sophisticated and complex, and every investor needs to know how they work for more efficient investing.
Every investor needs to study up on ETFs before actually investing in them, remarks John Spence for MarketWatch. This research is crucial step that many investors have ignored, burning them in the process.
For instance, United States Natural Gas (UNG) dropped more than 50% last year, but investors still put money into the fund in an attempt to time a bottom to natural gas prices. According to Morningstar, investors may have lost $1.5 billion betting on the ETF. Additionally, the ETF lost money rolling futures as a result of "contango," and the fund also has a tax structure like a limited partnership.
Nicholas Colas, ConvergEx Group chief market strategists, stresses the need to look at an ETF's "portfolio construction, re-weightings, management fees or index being tracked." Different ETFs have varying sector weightings - some ETFs that track similar things may even have sector weightings that are completely disparate. Furthermore, some ETFs have high weightings in their top holdings, so be sure to look at what makes up the fund and be sure you are comfortable with it.