With over 1,600 U.S.-listed exchange traded funds on the market, building an investment portfolio may seem daunting, but it does not have to be.
Some investment advisors point out that new ETF investors can build a foundation with plain-vanilla, index-based products, writes Ari I. Weinberg for the Wall Street Journal.
“We focus on the largest ETFs by market cap because there is no need to buy anything else,” Mike Kane, chief executive of the asset-management firm Hedgeable, said in the WSJ article. “Investors are over complicating things by using more-exotic ETFs.”
Many of the largest ETFs capture broad market strokes. For instance, the SPDR S&P 500 ETF (NYSEArca: SPY) andiShares Core S&P 500 ETF (NYSEArca: IVV) are the two largest U.S.-listed ETFs on the market, with $201.8 billion and $71.2 billion in assets under management, respectively. The two ETFs try to mimic the performance S&P 500 index.
These broad, index-based ETFs try to passively reflect the performance of an underlying index, capturing large sections of both the domestic and international markets at a minimal cost. For instance, SPY has a 0.09% expense ratio and IVV has a 0.07% expense ratio.
However, with many investment ideas already fully populated, more ETF providers are targeting niche market segments or specialized investment strategies. Potential investors should be aware that these types of ETF investments can become more volatile and come with higher expenses. For example, there are about 430 so-called enhanced ETFs, or funds that do not track traditional market capitalization-weighted indices, on the market with an average expense ratio of 0.62%, according to XTF data.
On the fixed-income side, selecting a right bond ETF may be slightly more tricky. While investors can still track the broad fixed-income market through a single offering, such as the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), a broad index-based bond ETF is less likely to generate the same level of returns as a broad equity ETF. [Bond ETFs for Cost-Conscious Investors]
Instead, more-focused bond ETFs provide investors greater control over potential market risks, such as credit risks or interest rate risks. Consequently, investors can choose among investment- or speculative-grade bond ETFs to adjust their credit risk exposure and utilize long- or short-duration ETFs to regulate interest rate risk. [Short-Term Treasury ETFs Trip As Yield Curve Flattens]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of IVV and SPY.