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4 Biggest Mistakes Investors Make While Buying ETFs

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ETF or exchange-traded funds can be good tools for investors when used appropriately. But with any investment, there are always things to watch out for. Here are some of the things one should be careful about:

Buying the hot new thing

More than a hundred new ETF products launch each year. Many of them chasing the latest hot trend- cloud computing, driverless cars, 3D printing, you name it and there is an ETF for that. Buying into the latest hot theme might make you big returns but take care, these product launches may come after there has been a run-up at the market. Buying at the top can be painful on the way down.

Thinking all ETFs are created equal

Consider China, at the start of 2014 there were more than a dozen broad-based China ETFs. For example, had you chosen PGJ the Power Shares Golden Dragon China ETF at the start of the year, you would’ve lost more than 7% of your money.

Had you instead chosen ASHR, the Deutsche Xtrackers Harvest CSI 300 China A Shares ETF, you would’ve earned a 51% return. Both are China ETFs and both can provide big diversified portfolios. But ASHR has significant exposure to Chinese A Shares largely consumer-focused stocks listed and traded on the domestic Chinese market which performs spectacularly well in 2014.

Don’t assume all ETFs are created equal just because two ETFs cover the same market, doesn’t mean they provide the same exposure or returns. There is no guarantee which fund will perform better in the future but if you wanted to invest last year in the growth of the Chinese consumer and the domestic investor base there, a little bit of research would have gone a long way.

Trading… Just because You can

Trading is central to ETFs, it’s right there in the name but just because you can trade an ETF intraday, doesn’t mean you should. Emotions are always an investor’s worst enemy. You sell at the bottom and buy at the top. ETFs intraday liquidity can be great when you want to get into or out of the market quickly but those situations are rare.

Only using market orders while buying/selling an ETF

When you do invest, consider using a limit order versus a market order. Market orders are instructions to buy or sell securities at the best possible price right now. That could work well for the most liquid ETFs but as you move beyond the top dozen ETFs you can find yourself getting trades executed at prices you don’t really want. Using a Limit Order means you agree to buy an ETF at a certain price or below and sell it at a certain price or above. A limit order puts the control back in your hands and can help you set the price on your terms.

Learn from these common mistakes to help avoid making them yourself.

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