Investing in any particular ETF also carries risks. However, if you follow the rules below, you can avoid the biggest mistakes.
1. Only invest physically
An ETF can buy the shares of an index or track it via a swap. If an investment company chooses the first variant, we can recognize this in the description by the “physical” replication method.
Why is this so important? If a fund buys a swap (derivative) instead, problems can arise in a crisis. In addition, everyone who buys a DAX ETF would like to bet on the shares it contains and not suddenly find Japanese shares in their portfolio later on.
2. The ETF should not be too small
If an ETF is too small, it has either not been on the market long or has not been very successful over the long term. In both cases, it’s worth not being there. In many cases, the initiators later close funds that are too small, which leads to additional costs. Therefore, the selected ETF may belong to the middle or largest group of a category.
3. Pay attention to the ETF composition
In order to know exactly what risks an ETF entails, we should always check the values it contains. It can happen that very large proportions are accounted for by just a few shares, although a total of 30 or more shares are included. In these cases, we can either avoid the fund entirely or give it a correspondingly low weighting in the portfolio.
1. No leveraged products
With an ETF, investors can now invest in all sorts of themes and strategies. Even leveraged positions are possible. But in most cases these risky funds even underperform the underlying index over the long term. They are superfluous for solid asset accumulation, like almost all special strategies.
2. No sector ETFs
Anyone who invests in an index fund usually wants to avoid the risk of a single value. But even an ETF can lose a lot of value and not increase for many years. This is often the case with very special sector funds.
They diversify like an ETF that maps an entire economy, but if, for example, the entire industry has not yet made any profits or is overvalued, the fund also collapses in crises.
If you still don’t want to do without them, you could keep them as a small addition to a core portfolio. But even then, the additional performance is low in the long term.
3. Don’t put everything on an ETF
Investors are best off in the long term if they never put all their eggs in one basket, no matter how tempting it may seem. There are too many risks and surprises in the market that can only be spread across a certain range. But even here we should not overdo it, because in the long term, there are too many transaction costs.