For all the benefits of having a seemingly infinite number of
choices, having countless options can also become overwhelming if
you begin to overthink it. The exchange traded fund (
) options now number in the hundreds, making it imperative to know
how to pick and choose among them. Below, we help you do just
At the end of March, there are 971 ETFs available with $819.8
billion in assets under management.
Wow. That's a
The sheer number of funds has led to intense competition to
attract investor money,
says Elvis Picardo for Investopedia
. One way funds have been differentiating themselves is by focusing
on very specific market niches, such as shipping or medical
devices. Other funds have latched onto hot investment trends such
as green energy. There are also home holes in the investment world
that have yet to be filled, and first movers may find themselves
well-positioned to benefit by closing up the gaps. [
10 Reasons to Love ETFs.
With so many funds available, investors should be keen on
identifying a few characteristics that may make or break a
- A fund should have a minimum of $10 million in assets. This
ensures that a fund will have ample liquidity and narrow bid/ask
spreads. If you're placing a larger order, contact an alternate
Here's how it works
- A fund should have high daily trading volumes. Trading
volumes can be as disparate as a few million trades per day to
only a few. High volumes ensure liquidity and provide for an easy
exit. Again, if you're a large trader, be sure to contact an
alternate liquidity provider.
- From a risk point of view, it may be wise to invest in funds
that track a broad index rather than an obscure index. But if you
want more risk, then do consider narrower funds - just have a
stop loss in effect. [
Not All ETFs Are Created Equal.
- ETFs are built to track indexes. All things equal, funds with
small tracking errors are preferable to ones with larger errors.
Deciphering Moving Averages.
- Funds that are the first to track an index are usually
preferable to ones that merely imitate the "first movers." This
is because the originating funds will usually attract more
investor money, thereby bolstering assets and trading volume and,
- Don't forget about cost. If you're considering a couple of
ETFs that are largely similar, look at what they cost. It isn't
the be-all, end-all, but all things being equal, lower cost is
Why Cheap Isn't Always Better.
- Where's your strategy? Before you buy, do you have a strategy
in place? If you don't have one, get one. A simple one we suggest
is trend following,
which you can learn how to do here
Sometimes, an ETF will have to liquidate. Generally, the fund
will notify its investors three to four weeks before the
liquidation. Investors facing liquidation will have one of two
- Sell before the stop-trading date in order to avoid a sharp
selloff in underlying assets.
- Hold onto the shares until liquidation, at which point
investors will receive a distribution of the sold assets. This
will allow an investor to avoid the potentially large bid/ask
spreads on the fund's shares.
By choosing carefully, ETFs are a great way to lower the risk
profile of your portfolio and gain broad exposure to a variety of
different market sectors.
For more information on ETF fundamentals, visit our
ETF 101 category
Sumin Kim contributed to this article.