One of the benefits of exchange traded funds (ETFs) is their flexibility to meet a wide spectrum of investor needs. Recently, I had a little extra cash, so I thought I’d take my own advice by buying some ETFs.
Of course, I already invest in ETFs with the help of my financial advisor; we’ve built an investment plan and it has been a financially rewarding experience. But this time, since it wasn’t a lot of money, I thought I might try investing on my own rather than add it to my advised portfolio.
As I embarked on the adventure of making my investment selections, I realized there aren’t many useful tools online to help those of us who aren’t investing a large sum of money. I work in this industry and have been exposed to training, resources and information, yet this experience made it very clear how someone without much investment experience may find it overwhelming.
But here’s something to keep in mind: Choosing the right ETF really isn’t that complicated. If you stay focused on a few key areas, you may find the experience to be much easier.
- Understand your goals—Are you investing for the long or short term? Do you need to build a core of broad investments or do you want specific exposures?
- Know the fund provider—Is the firm reputable in the ETF business? How well does it know its markets and industries?
- Examine total costs—Look at the fund’s management fees, commissions, capital gains distributions and index tracking performance.
Let me share with you how I went about it.
Simple steps for a short journey
Starting online. When I started researching ETFs, I ended up on my company’s iShares site to play with our Core Builder, which was the most helpful tool I could find. But after considering my investment objectives and time horizon, I realized I wanted to find exposures beyond the basic core funds. I already had that covered in my retirement and advised accounts.
Going beyond the basics. I thought about other strategies to invest in, and then it hit me—smart beta. I’ve been super excited about the concept of smart beta, especially factor funds and minimum volatility. I felt that these funds, which seek to provide exposure to specific market attributes that have historically driven risk and return and may potentially provide greater returns compared to traditional index benchmarks, such as the S&P 500, might best enhance my portfolio. So I honed in on smart beta ETFs.
Doing a little research. I began a deep dive into smart beta funds by reviewing the fund managers’ experience in ETFs and the financial markets. Smart beta, an investment approach blending aspects of both active and passive investing, is a relatively new concept in the world of ETFs. So I wanted to be sure that the company I went with not only understood passive index investing, but was also backed with an international research team to select the right stocks for the funds.
Checking the price tag. I then examined the costs associated with the fund. It’s important to not only look at the fund expenses, but also performance and trading commissions. You should be able to find expenses and performance costs of the fund you’re looking at on its website.
Narrowing the list of choices. Soon, I was able to whittle the selection to three ETFs. I compared their stock holdings, also listed on the funds’ websites, to create a diversified portfolio with minimal overlap. This ended up being pretty simple, and I now have smart beta in my personal account to complement my other traditional investments.
After going through this process, I can empathize with investors trying to do this research on their own. But by focusing in on your goals, the investment company and the total costs, it’s easier to streamline the process into something manageable.
More good news: this industry is developing new tools and resources to enhance the personal investor’s experience. I’m incredibly passionate about ETFs and not surprised that the sector saw a record flow of new investments in 2014. As the space evolves, I imagine more people will discover that investing in ETFs can be easy and rewarding.
Amy Belew is a Managing Director and head of Global Business Intelligence for Global iShares. She writes about ETF trends for The Blog, and you can read more of her posts here.