“Especially in a taxable account, the last thing you want is an esoteric, thinly traded fund that a sponsor shuts down,” thus creating a tax liability, Scott Dunbar of Arnerich Massena Inc., said. [Checkpoints on How to Really Understand ETFs]
Another important factor to consider with ETF selection is looking at the underlying holdings. It is crucial that an investor or advisor looks at the stocks an ETF holds because there is a gap between the title of a fund and the actual companies that make up the index. The underlying components are an indicator of how liquid the fund is. [ETFs: Still the Industry Bargain They Used to Be?]
When an ETF is used properly, they can give investors positions in a portfolio of stocks or bonds that would be expensive and time consuming to build otherwise. They are also good for accessing corners of the market such as overseas stocks, commodities or currencies, at a fair price and with the ease of a single transaction. An advisor can help sift through the 1,268 or so ETFs currently trading.
Tisha Guerrero contributed to this article.
