Exchange traded fund (ETF) investors are faced with a lot of decisions as they add funds to their portfolios. There are ways to help with the process and certain attributes to look for to find the most desirable funds.
The best ETFs are the ones that come with the lowest expense ratios, are well-diversified and broad-based. It’s usually the case that the more leverage, inverse exposure and hidden bells and whistles that an ETF has, the more expensive it will be. [How to Approach ETF Investing Better.]
Amanda B. Kish for The Motley fool says that an ETF with an expense ratio less than 0.40% is an indicator that you’ve probably got a pretty decent, broad-based fund.
But just because a fund costs more doesn’t mean you should rule it out. Consider the value it adds to your portfolio, in terms of performance, allocation or diversification. Some ETFs with higher-than-average fees can give you the kind of exposure that would be cost-prohibitive otherwise, or they give you exposure to sophisticated strategies that the average investor wouldn’t have access to. [Risks and Rewards of Using ETFs.]
Other things to consider when you’re an individual investor looking for ideal ETFs include:
- Where it is in relation to its trend line. When it’s above the 200-day, according to our strategy, it’s a buy signal. When it’s below, it’s a sell signal. [How to Follow Trends.]
- Trading volume. A fund with lower volume may be okay, but be sure to place small trades so you don’t move the price too much.
- Assets under management. Look for funds with at least $50 million in assets.
The considerations for advisors are a little different these days, thanks to the existence of alternate liquidity providers. Learn how they can help you execute trades here.
For more stories about ETFs, visit our ETF 101 category.
- SPDR S&P 500 (NYSEArca: SPY)
- Vanguard Total Market (NYSEArca: VTI)
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.