Exchange traded funds (ETFs) are a great alternative to mutual funds. They offer full transparency, intraday liquidity and flexibility, plus lower fees. There are also ways to target specific areas of the market and create a strategy with them, too.
ETFs are mutual funds that trade on stock exchanges, just as stocks do. Most are index funds, although there are a growing number of actively managed ETFs on the market. [How to pick apart an ETF.]
John Waggoner for USA Today has a rundown on some of the best benefits of ETFs and different ways to incorporate them into your portfolio.
- Hedge Inflation: The principal value of Treasury Inflation- Protected Securities rises with changes in the consumer price index, so check out iShares TIPS Bond ETF (NYSEArca: TIP) or PIMCO Broad U.S. TIPS (NYSEArca: TIPZ). Another option is to take some of the assets from your portfolio and allot them to iShares COMEX Gold (NYSEArca: IAU) to hedge inflationary fears. [How TIPS work.]
- Tilt: Tilt involves bringing up the aggressiveness of your portfolio by upping your exposure to a favorite sector. Look for areas that are up above their long-term trend lines (200-day moving average). [How to follow trends.]
- Income Seekers: There are plenty of dividend ETFs to select from, such as Vanguard Dividend Appreciation Index (NYSEArca: VIG). This way you get the upside of the dividend payers and less of the downside of the companies whose dividends are dwindling. [Why dividends are good for portfolios.]
- Basic: By investing in a total stock market fund, you are getting a large sampling of U.S. stocks. Vanguard Total Stock Market (NYSEArca: VTI) is an option if you’re the “set it and forget it” type.
For more stories about ETFs, visit our ETF 101 category.