Investors new to exchange traded funds can get lost in the sheer number of options, and fresh ETFs are listing on the market almost every day it seems.
More ETF choices allow investors to shop around, but it takes time and research. Investment researcher Morningstar was out with some pointers this week on what to look for when considering investing in new ETFs.
Over 200 exchange traded products were launched in the first half of 2011, taking the business to nearly 1,300 funds, reports Patricia Oey for Morningstar.
ETF providers have rolled out new products for dividends, high-yield sectors and international countries in an effort to meet investor demand for income and growth.
Exchange traded funds have opened new markets and asset classes to individual investors. Passive ETFs provide liquid and cost-efficient exposure to markets, but investors should be mindful of the risks, especially with more sophisticated ETFs. [Don’t Overlook ETF Risks.]
Morningstar offers some guidelines on how to sift through new ETFs:
- Investors should stick to ETFs that invest in traditional asset classes, and liquid, investment grade stocks and bonds. Bells and whistles such as leverage and inverse funds are for day trading purposes only. A basic, broad-based index tracking fund is safest.
- Let an ETF mature — in other words, let any new funds gain assets and liquidity.
- If a fund is not displaying liquidity, monitor the bid/ask spread. This will display how much the market agrees with the price of an ETF.
- Know the tax implications of an investment, and there will be no surprises come April 15. Different asset classes and commodities are taxed at different rates, as are capital gains. By being aware of this and considering the projected behavior of an ETF, the risk can be mitigated. [Investors Plowing Cash Into ETFs in Second Quarter.]
Morningstar finds a few new ETFs worth a look:
- PowerShares S&P 500 Low Volatility (NYSEArca: SPLV) tracks large-cap stocks that have shown more price stability than their peers. [ETF Chart of the Day]
- High momentum is another trend seen this year, with the launch of Russell 1000 High Momentum (NYSEArca: HMTM).
- Market Vectors Germany Small-Cap ETF (NYSEArca: GERJ) is alluring with its small-cap exposure and representation of Germany, which is an underrepresented country in many portfolios, according to Morningstar.
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. 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.