When it comes to investing with exchange traded funds (ETFs), there are simple guidelines to help determine which funds will work best for you and your investment needs.
- Look at an ETF’s expense ratio. There are enough ETFs to choose from that there’s plenty of competition in this realm. Some of the broad-based funds offer fair to low fees for investing, with superior diversification support. Some of the niche ETFs can get pricey, so check this out to avoid eating into principal. (For trading tips on ETFs, read here).
- Think about why you are investing in the particular ETF; reasons for this would include the diversification benefits it could offer and the asset classes it covers. that are hard to reach, such as currencies and commodities, which become easy to access through ETFs.
- Look for ETFs with higher trading volume. Thinly traded ETFs could have a wider bid/ask spread. (Read about building a portfolio with ETFs here).
Good ETFs have a reasonable expense ratio, a well-diversified underlying index and underlying stocks with lots of liquidity. By contrast, things to watch out for are high expense ratios, a small number of companies dominating the ETF’s total weighting and ETFs that represents a less liquid area of the market, such as a single-country ETF or a thinly traded sector.
For more stories about ETFs, visit our ETF 101 category.
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.