Three Tips for Picking the Best ETFs for Your Portfolio
By John Persinos
The number of exchange traded funds (ETFs) has exploded in recent years. As of this writing, the total number of index-based and actively managed ETFs, including commodity ETFs, based in the United States stood at 3,108. Total net assets of these ETFs were $8.1 trillion and accounted for 24% of assets managed by investment companies.
Below, I'll give you three simple tips for separating the best ETFs from the rest of the crowd. But before we get to that, let's take a quick look at how ETFs work…and most importantly, how you can benefit from them.
ETFs have been around for over 20 years. Like index funds, they track an underlying index (such as the S&P 500 or Russell 2000), a basket of assets, overseas markets, or commodities. There are even ETFs that track the price of cocoa.
However, unlike index funds, ETFs trade on stock exchanges, just like stocks. You can buy and sell them through your broker. You can also sell them short.
One of the main benefits ETFs offer investors is convenience: with a single order, you can jump into the sector, index or commodity of your choice. The best ETFs' expense ratios are also typically much lower than the average mutual fund, because you aren't paying for professional management.
This adds up to a substantial savings. According to recent Morningstar figures published by the Financial Industry Regulatory Authority (FINRA), the average total operating expenses of U.S. large-cap stock mutual funds came in at 1.31% of assets, while comparable ETFs averaged just 0.47%.
Below are three tips to help you pick the best ETFs for your portfolio:
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