If done correctly, ETFs can help form a well-rounded portfolio that covers the total market with relatively low expenses and little tax issues while keeping things simple. Let’s talk about things to look for when you’re choosing ETFs.
Putting ETFs to Work
Though ETFs act like index funds, they are traded like stocks. This means that an investor is capable of more trading options since ETFs are traded throughout the trading day, with all the quirks and benefits trading stocks may offer like shorting or placing limit orders. Trading ETFs like stocks, on the other hand, does come with commission fees every time an order is placed in most instances, so keep that in mind.
Here are a few general things to look for:
- Identify the asset class. By using the ETF Analyzer, you can find all ETFs in a given sector, asset class or global region.
- Assets. What are the assets in an ETF? A general benchmark to use is somewhere in the $100 million range. The more assets, the more liquidity a fund has. Our ETF Analyzer allows you to sort ETFs by asset.
- Trading volume. How high is it? Are people trading it? If no one is trading it, you could have trouble unloading it when it’s time to do so. Using the ETF Analyzer, you can sort funds by volume and average trading volume.
- Cost. While small fees may not seem like much, they do add up over time. ETFs are on average cheaper than mutual funds, but that doesn’t mean they’re all cheap. Use our ETF Analyzer to sort by expense ratio to see if you’re getting a good deal.
- Diversification. Does it diversify your portfolio? For example, if you owned both United States Oil (NYSEArca: USO) and Market Vectors Russia (NYSEArca: RSX), you could wind up with more exposure to oil than you had intended. You can use our ETF Resume to find the holdings and composition of any ETF.
- More diversification. Also be sure that the ETF is diversified at a level that you’re comfortable with. Some funds have small weightings in lots of holdings while others give 50% of the fund’s weight to the top three names. You can find the weighting of all holdings on the ETF Resume.
- Unique issues. Make sure that you understand the ETFs you’re considering. For example, know that with physically-backed commodity ETFs, there are certain tax consequences. Leveraged and inverse ETFs need to be closely monitored. ETFs with futures contracts generate K-1s. Know these things to avoid unpleasant surprises for your clients. You can find the prospectus for any ETF on the ETF Resume.
Once you’ve chosen a few ETFs, you can start building a portfolio by going to the Analyzer and using the check boxes to add ETFs to your portfolio. You can also do this from the Dashboard.
If you’re not ready to add an ETF into a portfolio and you’d rather watch it first, you can also add funds to your Watchlist through either the Analyzer or the Dashboard!
If you’d rather not go through the work of portfolio building, we also have a number of model portfolios already created. They suit a number of objectives, situations and types of markets. When you click on any portfolio, there are tabs explaining who it’s for, the design goals, a portfoliograph, ETFs held in the portfolio and expenses and performance.