Exchange-traded funds or ETFs are hailed as a low-cost and diversified way to invest in the stock market.
There’s truth to this statement.
But as with any investment vehicle, we shouldn’t take a good idea too far.
ETFs have pitfalls you should know before you start investing in them.
You may want to look beyond what’s shown on paper and consider the real-life implications of putting your money into ETFs.
There is no free lunch.
Concentration in numbers
On paper, ETFs offer immediate diversification for a small sum of money.
It’s an ideal arrangement for investors who are starting out.
Yet, as you will soon find out, some indexes are more concentrated than others.
The recent “special rebalance” of the NASDAQ 100 Index (INDEXNASDAQ: NDX) has exposed the influence of the largest stocks within the index.
It’s no different in Singapore.
The Straits Times Index (SGX: ^STI) of the STI is heavily weighted towards the big three Singapore banks....
