One of the biggest quandaries for exchange traded fund (
) investors is finding the "right" ETF. The answer to this
question, however, is a very subjective one.
Similar to a surfer who thinks his board is the best, what makes
an ETF fabulous for one investor may not work for another.
Matt Krantz for
the best ETFs are those that fit your investment goals.
Here are some guidelines to follow from both Krantz and yours
Relatively low expenses:
ETFs are cheaper than mutual funds…
. It would be folly to assume that all ETFs are cheap, so always
check the expense ratio to ensure you're getting the best
Small premium or discount:
Sometimes the price of an ETF is driven higher than the value of
its holdings; that is, it's selling for a premium. Similarly, the
share price of an ETF can be pushed below the value of the stocks
it owns. Then, it's selling at a discount. As an investor, you
want the premium or discount to small - an indication that the
ETF is being traded efficiently. [
Are ETFs Dangerous?
If shares of the ETF you own are changing hands frequently, you
have a better chance of getting the best price when you want to
buy or sell. You also want to make sure your ETF will survive a
slower market and not close up shop. [
Claymore Closes Up Shop for 4 ETFs.
The ETF needs to fit with your existing holdings and complement
them. If you already have copper miner exposure, then you
probably don't need that Chile ETF. If you're holding an oil
futures fund, perhaps you'll want to skip the oil producers ETF.
That is, unless you do want that exposure. It's up to you.
If you're a risk-averse investor, leveraged and inverse ETFs may
not be best for you. Perhaps you do want a lot of risk, in which
case, conservative Treasury bond ETFs may not be giving you the
excitement you crave.
If you want to learn even more about ETFs, there are dozens of
stories in our
section about choosing ETFs, fund types, ETF strategies and much
Tisha Guerrero contributed to this article.