Exchange traded funds (ETFs) have grown rapidly over the past decade, and as a result, providers have sliced the market into ever-thinner segments. Having such a narrow slice of the market can help fill a gap within a portfolio. However, these funds are not very diversified and typically are more expensive and volatile than broad-based ETFs. Narrow ETFs also can have wide bid-ask spreads, which can cut into investors’ returns. For example, the HealthShares Infectious Diseases ETF (HHG) had an average spread of 1.6%. In contrast, a large, more actively-traded fund such as the iShares S&P 500 ETF (IVV) had an average spread of only 0.02%, says Amanda B. Kish for The Motley Fool.

Remember that less expensive ways are available to get diversified exposure to a wide array of stocks. You can keep trading costs down as well as expenses by investing in a broad-based ETF like the SPDRs (SPY) or the Vanguard Total Stock Market ETF (VTI). However, if you do choose to use narrowly-focused ETFs, research them thoroughly to make sure they match your financial goals.

Tags: VTI