Lesson 2 of 2 · 7 min read
Pitfalls
Most ETF mistakes aren't in the product but in what you assume about it.
Physical and synthetic
A physical ETF actually buys the shares in the index. A synthetic one agrees with a bank that it will deliver the index return, which means you have a counterparty. Synthetic isn't necessarily bad and sometimes tracks more precisely, but you should know you're buying a risk that physical doesn't carry. For a first ETF, physical is the quietest answer.
'Global' isn't evenly spread
A broad world index weights by market value, which means a large share sits in American companies and a hefty slice in a handful of big tech names. That isn't a flaw, but it is something other than the even spread people picture. Check the factsheet for the top ten holdings and the country weights before assuming you're in everything.
Trading at the wrong moment
Buy an ETF holding American or Asian shares while those markets are shut and the bid-ask gap is wider, so you pay more. Trade when the underlying market is open where you can, and avoid the first and last minutes of the day. And use a limit order rather than market, so the price you get can't surprise you.
Stocky says
A limit order costs nothing extra and protects you from a bad price at a thin moment.
Remember this
- Synthetic adds a counterparty. Physical is the quietest choice for a first ETF.
- A world index weights by market value, so the US and big tech weigh heavily.
- Trade while the underlying market is open, and with a limit order.
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