3 red flags to avoid the worst ETFs
The proliferation of ETFs is more about profiting the financial industry than serving investors' best interests. Here are three red flags investors can use to avoid the worst ETFs.
There are a number of reasons why there are so many ETFs available today.
It's no secret that Wall Street loves a good ETF. They're easy to sell and they're profitable. So it's no surprise that more and more products are being churned out. But at what point does it all become too much?
The proliferation of exchange-traded funds (ETFs) in recent years has been driven primarily by Wall Street firms looking to profit from the trend, rather than by investor demand. I leverage reliable and proprietary data to identify three red flags you can use to avoid the worst ETFs: 1. Lack of liquidity: ETFs that trade infrequently can be difficult to sell, leading to potential losses in a down market. 2.
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My vision for this issue is simple: avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Small ETFs also generally have lower trading volume, which translates to higher trading costs via larger bid-ask spreads.
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ETFs are supposed to be cheap, but not all of them are. The first step to take is to benchmark what cheap means. This will help you to find the right ETFs that fit your definition of cheap.
Investors often seek out investment products with low fees in order to ensure they are getting the best value for their money. However, it is important to remember that not all low-fee products are created equal. When investing in ETFs, be sure to research the total annual costs of the fund in order to ensure you are getting a good value for your investment.
It is interesting to see that the most expensive style ETF is Emles Alpha Opportunities ETF (EOPS), while the JPMorgan BetaBuilders U.S. Equity ETF (BBUS) is the least expensive. State Street (SPGL, SPTM) ETFs are among the cheapest. This shows that there is a wide range of prices for different ETFs, and that investors need to be aware of the costs associated with each one.
There are a lot of different ways to invest in the stock market, and one of them is through style ETFs.
Investors need not pay high fees for quality holdings. The best ranked style ETFs offer low costs and attractive ratings. ILVC’s 0.04% total annual cost earns it a very attractive rating. Alpha Architect U.S. Quantitative Value ETF QVAL is the best ranked style ETF overall that meets liquidity minimums. QVAL’s very attractive Portfolio Management rating and 0.54% total annual cost also earns it a very attractive rating.
We believe that the quality of an ETF's holdings is more important than its management fee. However, we are concerned about the iShares Morningstar Small Cap Growth ETF (ISCG) which holds poor stocks and has a very unattractive rating. We believe that this ETF's performance will be poor despite its low total annual costs.
3. Poor Holdings
Investors should be aware that the performance of an ETF is largely determined by the quality of its holdings. Figure 2 shows the ETFs within each style with the worst portfolio management ratings, based on the quality of the fund's holdings. Avoiding poor holdings is the most important factor in avoiding bad ETFs.
As demonstrated in Figure 2, style ETFs with the worst holdings tend to underperform the market. There are a number of reasons why this may be the case.
Invesco and State Street are the two biggest providers of exchange-traded funds (ETFs) in the United States. However, a new analysis from Figure 2 shows that these two companies also offer the majority of ETFs with the worst holdings.
The Roundhill MEME ETF is the worst rated ETF in Figure 2, according to our analysis. The Tidal SoFi Gig Economy ETF, Invesco S&P Small Cap High Dividend Low Volatility ETF, Nuveen Small Cap Select ETF, iShares Morningstar Small Cap Growth ETF, and IndexIQ U.S. Mid Cap R&D Leaders ETF all earn very unattractive predictive overall ratings, which means not only do they hold poor stocks, they charge high total annual costs.
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If you're thinking about buying an ETF, it's important to do your research and analyze the ETF's holdings. The ETF's performance is directly linked to the quality of its holdings, so you need to make sure you understand what you're buying. Otherwise, you could end up losing money.
Exchange traded funds (ETFs) have become increasingly popular in recent years, as investors look for ways to diversify their portfolios and access different markets.
The goal of disclosure is to ensure that investors are aware of any potential conflicts of interest that may exist. In this case, the authors of this article have no financial stake in the stocks, styles, or themes mentioned, and thus will provide unbiased analysis and commentary. This allows readers to make more informed investment decisions.