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Busting ETF myths

Let’s be clear on what ETFs really are and what they are not.

Myth 1: ETFs are volatile because they are traded throughout the day.

Reality: ETF prices are transparent, but that doesn’t make them more volatile.

The price of an ETF reflects the changing value of its underlying securities and the supply and demand of the ETF in the marketplace. The difference between an ETF and an actively managed fund is that the price of a managed fund, which similarly reflects the value of its underlying securities, is fixed once a day and only after the market closes, while ETF pricing changes throughout the day in real time. This doesn’t mean that ETFs are more volatile – their price changes are just more visible.

Myth 2: ETFs are inherently risky.

Reality: Risk is driven by the assets you're investing in, not necessarily the vehicle used to access the assets.

Just like a managed fund, the risk profile of an ETF is tied to its underlying holdings, or the assets it invests in: so a managed fund and ETF that hold similar stocks or bonds will have similar risk profiles. But that risk is not related to whether you choose to hold a managed fund or an ETF.

On the flip side, an ETF offers greater diversification than an individual stock, which may help reduce risk in a portfolio1.

Myth 3: ETFs only apply if you’re investing in a very specific piece of the market.

Reality: You can use ETFs for a wide range of exposures and outcomes.

ETFs come in virtually any “flavour” you can think of. They offer low-cost access to specific markets (e.g., a country or industry), and to broad exposures (e.g. ASX, Hang Seng, STI or the U.S. bond market). This, combined with the ease and speed with which they can usually be bought and sold, means that investors can access investments that may otherwise be out of reach.

So whether it’s hard-to-access foreign markets, core building blocks for your portfolio, or funds that target specific outcomes, there’s an ETF that can help.

Myth 4: ETFs aren’t for income investors since they don’t pay dividends.

Reality: iShares ETFs offer a diverse set of solutions for investors looking for income.

The hunt for income in the low interest rate environment can be challenging. But whether it’s through dividend-paying stocks or fixed income exposures, ETFs offer investors a broad range of opportunities to potentially generate income. And with ETFs, you get the added benefit of greater diversification than an individual stock or bond, all typically at a lower cost than a managed fund.

Myth 5: ETFs are just for day traders.

Reality: ETFs are effective investment tools for many types of investors.

Because ETFs have the same trading flexibility as stocks, short-term traders can use ETFs to quickly move in and out of a position. But ETFs are also a cost-efficient way to build a long-term, core portfolio. In fact, almost 80% of ETF investors view them as long-term holdings with an average holding period of nearly 6 years2.

Diversification does not fully protect you from market risk and does not guarantee returns or eliminate potential for loss.

2  Source: 2018 BlackRock ETF Pulse Survey, conducted from August 22nd through September 3rd, 2017 by Market Strategies International, an independent research company. The survey interviewed over 1,000 individual investors from nationally representative online samples of household financial savings/investment decision makers age 21-75, with $100K+ in investible assets and aware of ETFs in the US.


About the Author
iShares by BlackRock

iShares unlocks opportunity across markets to meet the evolving needs of investors. With more than twenty years of experience, a global line-up of 1400+ exchange traded funds (ETFs) and $3.7 trillion in assets under management as of March 31, 2024, iShares continues to drive progress for the financial industry. iShares funds are powered by the expert portfolio and risk management of BlackRock.

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