ETFs have become one of the most popular investment vehicles in the last few years thanks to the advantages they offer, such as improved liquidity and lower costs. Nevertheless, while their concept is quite simple, many investors misunderstand some characteristics and build unfounded expectations. Due to their misunderstanding, these investors run the risk of realizing the facts the hard way, i.e. only when significant losses mount.
First of all, the name of an ETF is not sufficient to reveal what an investor should expect from it. For instance, the United States Oil ETF (USO) does not track the performance of the spot price of oil. Instead, it tracks the performance of oil futures while it bears the contango cost, i.e., the cost of rolling over the futures of the prompt month to the next month. As contango can be pronounced in oil and other commodities, this cost can greatly affect… Read More …