So, you’ve got your eye on an exchange traded fund (ETF). It’s performing well, it’s above its trend line, the future prospects are good…SOLD!

Not so fast, buddy.

When considering an ETF for your portfolio, there are certain other questions you should always ask.

Thaddeus Malley for ETF Guide wants you to ask these questions, even if you have all the backtesting data possible. ETFs are not a one-size-fits-all product, and performance alone should not be your guide.

  • Does this ETF diversify my portfolio? Different exposure to asset classes such as small, mis and large-caps, commodities, and bonds give a well-rounded approach.
  • Does this ETF magnify positions I already have? Whether fundamentally weighted or by market cap, many ETFs have similar holdings. This works against diversification.
  • Do I understand the ETF? Know what you are buying…period.

Other ideas to keep in mind are historic standard deviation, beta and the Sharpe ratio. By looking at actual returns and by using common sense the opportunity is all yours. Just do your homework!

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.