Investing in ETFs? This Sneaky Expense Could Cost You Thousands of Dollars.
It's easy to believe that fees are the only sneaky expense you'll encounter. However, that's not quite true.
Investing in ETFs? This Sneaky Expense Could Cost You Thousands of Dollars.
Overview
Exchange-traded funds (ETFs) have become immensely popular among investors for their simplicity, diversification, and low expense ratios. However, there's a hidden expense that's easy to overlook but can cost you thousands of dollars over time. It's the tracking error. Here's a breakdown of what a tracking error is and how you can avoid getting caught in its profit-eroding trap.
In a perfect world, an ETF would match the index it tracks. For example, if you purchase a broad-market ETF tracking the S&P 500, that ETF's gains should mimic those of the S&P 500. If the ETF consistently earns less (or more) than the index, the difference is due to a tracking error. A high tracking error rate means the ETF is not doing a good job of following the index, and that could cost you money in the long run.
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Details
Source
Originally published at www.fool.com.
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