With the ETF industry producing new products at a furious pace, investors can implement a wide range of investing and trading strategies using ETFs. Unfortunately, most of these strategies are a bad idea.
It used to be that investing in ETFs was synonymous with widely-diversified passive investing. Investors could buy XIU for Canadian stocks, VTI for U.S. stocks, and maybe a couple of others for bonds and foreign stocks, and then go to sleep for a decade. However, new ETFs are nothing like these older products.
Investors who have been unhappy with their mutual fund returns can now bring their faulty investing strategies into ETFs. Many mutual fund investors used to chase the previous year’s hot fund with disastrous results. Now they can bring new hope to the ETF domain and chase the latest hot ETFs.
Investors who used to try to guess the next hot sector using mutual funds can now do the same with ETFs. Unfortunately, most of them will just buy the sector hottest in the recent past (and now expensive) regardless of whether they trade mutual funds or ETFs.
Many good ETFs help investors by having lower MERs than mutual funds. However, investor behaviour can easily eliminate this advantage. Frequent trading drives up commission costs as well as the less visible bid-ask spread losses.
Better investing comes from better strategies. Moving the same failed investing strategy from mutual funds to ETFs will lead to disappointment. The cost difference between mutual funds and ETFs is significant, but the difference between good and bad investing strategies is much bigger.