How can you spot a bad ETF?

How can you spot a bad ETF?

How can you spot a bad ETF? Many people investing in exchange-traded funds aren’t doing their homework, according to finance blogger Ben Carlson.

Writing on his blog, A Wealth of Common Sense, Carlson said many investors – particularly millennials – are investing in ETFs that simply aren’t performing well. As an example, Carlson pointed out UWTI, an ETF that utilizes leverage to allow investors to try to earn three times the upward price move in oil.

“Millennials trading this thing is like driving a truck full of nitroglycerine through a match factory,” Carlson wrote. “This year alone it’s down over 50%. It also has over $1 billion in assets.”

DWTI, meanwhile, is a 3X short oil ETF that’s down 45% this year.

“So while the price of oil is up marginally this year, both these ETFs have gotten slaughtered,” Carlson wrote.

“The whole reason you own ETFs as an investor is to gain exposure to a specific asset class, strategy, sector or investment type at a low-cost in a tax-efficient, liquid fund structure,” Carlson wrote. “ETFs are one of the most efficient ways to diversify at a low cost. But their convenience is a double-edged sword that can easily lead to huge losses for those who don’t understand what they’re getting themselves into.”

So what are the worst ETFs to own? Here’s Carlson’s list of red flags:
  • ETFs you don’t understand are bad news.
  • If you can’t get a good idea of the all-in costs involved, run.
  • If they sound too good to be true, they probably are.
  • If they’re too costly or hard to implement, skip them.
  • And finally, don’t use an ETF as an investment if it was created for trading purposes.
“Some investment strategies sound great on paper but are difficult to implement in real life,” Carlson wrote. “All ETFs are not created equal.”

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