One of the biggest quandaries for exchange traded fund (ETF) investors is finding the “right” ETF. The answer to this question, however, is a very subjective one.
Similar to a surfer who thinks his board is the best, what makes an ETF fabulous for one investor may not work for another. Matt Krantz for USA Today reports that the best ETFs are those that fit your investment goals.
Here are some guidelines to follow from both Krantz and yours truly:
- Relatively low expenses: ETFs are cheaper than mutual funds…on average. It would be folly to assume that all ETFs are cheap, so always check the expense ratio to ensure you’re getting the best deal.
- Small premium or discount: Sometimes the price of an ETF is driven higher than the value of its holdings; that is, it’s selling for a premium. Similarly, the share price of an ETF can be pushed below the value of the stocks it owns. Then, it’s selling at a discount. As an investor, you want the premium or discount to small — an indication that the ETF is being traded efficiently. [Are ETFs Dangerous?]
- Active trading: If shares of the ETF you own are changing hands frequently, you have a better chance of getting the best price when you want to buy or sell. You also want to make sure your ETF will survive a slower market and not close up shop. [Claymore Closes Up Shop for 4 ETFs.]
- Overall fit: The ETF needs to fit with your existing holdings and complement them. If you already have copper miner exposure, then you probably don’t need that Chile ETF. If you’re holding an oil futures fund, perhaps you’ll want to skip the oil producers ETF. That is, unless you do want that exposure. It’s up to you.
- Risk: If you’re a risk-averse investor, leveraged and inverse ETFs may not be best for you. Perhaps you do want a lot of risk, in which case, conservative Treasury bond ETFs may not be giving you the excitement you crave.
If you want to learn even more about ETFs, there are dozens of stories in our ETF Education section about choosing ETFs, fund types, ETF strategies and much more!
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.