There can be a lot of misinformation about ETFs, including the myth that they are all passively managed. The truth is that ETFs have evolved over the years to include a wide variety of products, such as actively managed funds and a range of thematic investment strategies.
In this article, we dispel five common misunderstandings and myths of ETFs.
Top 5 ETF Myths
Many investors have heard about the fundamental benefits of ETFs, including their low fees and passive management. Although assumptions about these features of ETFs are generally accurate, there are several common misconceptions about the range of qualities that the different types of ETFs can possess.
For example, not all ETFs have low expense ratios and not all ETFs are passively managed.
Five of the most common myths about ETFs include:
- There are no actively managed ETFs.
- All ETFs have low expense ratios.
- ETFs only track broad market indexes.
- ETFs are riskier than mutual funds.
- ETFs are not good investments for beginners.
Myth 1: There Are No Actively Managed ETFs
Most ETFs are passively managed, meaning that they seek to track the performance of a benchmark index or asset. However, many investors may be surprised that there are more than 100 actively managed ETFs on the market. Furthermore, through the end of 2022, the top 10 actively managed ETFs by AUM had assets of well over $5 billion.
Myth 2: All ETFs Have Low Expense Ratios
As fees have fallen for mutual funds in recent years, not all ETFs are the cheapest funds on the market. For example, equity ETFs average 0.16% expense ratios, whereas some equity mutual funds have expense ratios below 0.10%. A popular technology ETF, the ARK Innovation ETF (ARKK), has an expense ratio of 0.75%, whereas the average stock mutual fund expense ratio is 0.47%.
Myth 3: ETFs Only Track Broad Market Indexes
Many ETFs track a broad market index, such as the S&P 500, but one of the top benefits of ETFs is their ability to capture the performance of niche markets, such as a single sector or sub-sector, an investment objective, such as growth or income, or even trading strategies, such as leveraged ETFs or inverse ETFs.
Myth 4: ETFs Are Riskier Than Mutual Funds
Since ETFs trade like stocks, or because many traders use ETFs, there can be a misunderstanding that ETFs are riskier than mutual funds, which are known for their broad diversification. However, ETFs can offer just as much diversification as mutual funds, as well as a wide range of choices for investors with almost any degree of risk tolerance.
Myth 5: ETFs Are Not Good Investments for Beginners
While ETFs are widely used by advanced investors and professional money managers, ETFs can make good investment choices for all types of investors, including beginners and young investors. With so many types of ETFs to choose from, and because of their simplicity and accessibility, investors of all kinds can benefit from them.
ETFs have come a long way since their beginnings more than three decades ago. While the first ETFs were known for their low expenses and passive management, there are dozens of different types of ETFs that can have a range of expenses from low to high, active management styles, various degrees of risk, and choices that can benefit almost any investor from beginner to advanced trader.