Considering an ETF? (2024)

FAQs

What to consider when choosing ETF? ›

Before purchasing an ETF there are five factors to take into account 1) performance of the ETF 2) the underlying index of the ETF 3) the ETF's structure 4) when and how to trade the ETF and 5) the total cost of the ETF.

A favored measure is tracking difference—a statistic that looks at how far an ETF has lagged its benchmark, on average, over a one-year period. Tracking difference incorporates the effects of an entire range of management decisions, from securities lending to optimization decisions.

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

Compare the market price to the NAV to determine if the ETF is trading at a premium or discount to its NAV. If the market price is higher than the NAV, the ETF is trading at a premium. If the NAV is lower than the price, the ETF is trading at a discount.

If an ETF still has large trading volumes, a price that isn't moving radically up and down with each new trade, and fairly small bid-ask spreads (see the next section), then the market price is likely a better indicator of portfolio's true value than the NAV, and it is safe to proceed with a trade.

The appropriate benchmark for an ETF depends on what index or sector it tracks. The S&P 500 is a benchmark index for broad-based portfolios and ETFs like the SPY. Passive ETFs try to mimic the benchmark's performance, while actively managed ETFs attempt to beat it.

ETF Database Realtime Ratings

Each ETF is rated relative to others in its category using six different metrics, including liquidity, expenses, performance, volatility, dividend and concentration.

Asset allocation ETFs are designed to simplify the investment process by offering a predetermined asset allocation strategy, which takes into account various risk profiles and investment horizons. For example, a typical balanced ETF might invest in a target allocation of roughly 60% stocks and 40% bonds.

This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.

Can you retire a millionaire with ETFs alone? ›

Investing in the stock market is one of the most effective ways to generate long-term wealth, and you don't need to be an experienced investor to make a lot of money. In fact, it's possible to retire a millionaire with next to no effort through exchange-traded funds (ETFs).

"A newer investor with a modest portfolio may like the ease at which to acquire ETFs (trades like an equity) and the low-cost aspect of the investment. ETFs can provide an easy way to be diversified and as such, the investor may want to have 75% or more of the portfolio in ETFs."

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

Expense ratios can range from as low as 0.03% for some passively managed ETFs to over 1% for actively managed or specialized ETFs. Factoring in 0.5% to 0.75% for actively managed fees is considered to be around the average.

ETFs for beginners

One way for beginner investors to get started is to buy ETFs that track broad market indexes, such as the S&P 500. In doing so, you're investing in some of the largest companies in the country, with the goal of long-term returns.

VOO typically provides a higher dividend yield compared to SPY. This aspect is particularly attractive to investors who prioritize income generation from their investments.

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.