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.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.