5 Myths About ETFs You Can’t Afford To Miss

Exchange-traded funds (ETFs) have become an essential part of investing.

Not only do they allow you to diversify with strong stocks, but they’re also relatively inexpensive. However, as with any investment vehicles, there are some common misconceptions that we’d like to dispel.

No. 1 – ETFs Are Inherently Risky

All investments carry risk. All risk with an ETF is tied to its underlying holdings, or the assets the fund invests in. For example, an international ETF or managed fund may have higher risks than a U.S. investment grade corporate bond ETF. But that risk is not related to whether you choose to hold a managed fund or an ETF, noted Blackrock. At the same time, as we noted, ETFs do offer greater diversification than an individual stock, which may help reduce risk in a portfolio.

No. 2 – ETFs Are Limited

That’s not true at all. In fact, ETFs actually come in hundreds of “flavors.” You can gain access to specific industries and, or countries. You can also use some ETFs for broad investing for all countries, and most of the holdings in individual indices, such as the QQQs or the DIA. Or, you can buy a healthcare ETF, which offers broad diversification with pharmaceutical, healthcare, and biotech stocks, for example. You’re never limited…

No. 3 – ETFs Don’t Pay Dividends

Again, not true. Look at the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), for example, which carries a balanced portfolio of large-cap value stocks, while also providing investors with a 10% yield.

With an expense ratio of 0.04%, the ETF offers exposure to some of the biggest and most stable companies in the market. Top holdings of JEPQ include Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA), which has climbed nearly 30% this month.

This exposure, coupled with a steady income from dividends is proof there is an ETF out there to satisfy whatever strategy you choose, including income investing.

No. 4 – All ETFs Have Low Expense Ratios Debunked, different funds employ different strategies and sometimes strategies or fund managers demand higher expense ratios than other funds. The AdvisorShares Ranger Equity Bear ETF (HDGE) has an expense ratio of over 4%, much higher than that of your run of the mill ETF. Typically, a range of 0.5% to 0.75% is considered fair and a ratio above 1.5% is considered high.

Another reason for this difference is some funds are actively managed and others are more of the set and forget variety, so the fund managers need to do less work in order to let the fund’s strategy play out.

No. 5 – Net Asset Value Isn’t Worth Knowing

One of the key terms to understand is Net Asset Value (NAV), as we’ve noted in prior articles. The NAV is the sum of all of the LIT ETF assets (the value of its holdings in cash, shares, bonds, and other securities), less liabilities, divided by the number of shares outstanding.

For example, let’s say an ETF has $10 million in securities, $4 million in cash, $2 million in liabilities, and has a million shares outstanding. That would give the ETF a net asset value of $12, calculated with: ($10 million + $4 million – $2 million) / $1 million, which is 12. With that information, an investor can determine if an ETF is worth considering.

Fidelity puts it this way…

“It’s basically an indication of the fair value of a single share of the fund. It provides investors a reference point around which they can gauge any offers to buy or sell shares of the fund. If you own 100 shares of an ETF whose NAV is $50, and someone offers $55, you have a solid basis from which to judge their offer. In reality, though, most ETFs trade much closer to their NAV.”

Now that we have put those common misconceptions to bed, we are ready to get started on our investing journey. With a little assistance, of course…

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