Be Careful Not to Chase the Latest ETF Craze
Exchange-Traded Funds (ETFs) have increased in popularity over the last couple of years and in my opinion deservedly so. ETFs are investments similar to mutual funds in that they hold more than one stock or bond and they usually track indexes as big as the S&P 500 or as little as gold and real estate. Three major benefits to ETFs are: 1) they are traded on the stock markets just like stocks, which make them easy to purchase; 2) they allow investors to chase certain indexes without being spread too thin, even foreign investments; and 3) ETFs are generally inexpensive to purchase and carry tax benefits other investments do not.
ETFs are great for the DIY investor that likes to be diversified while still being aggressive. For example, investors can safely chase a down/losing index like real estate without having all their eggs in the same basket by purchasing individual real estate stocks. While ETFs may sound like a no brainer investment, the popularity of them is forcing companies to come out with the newest and greatest index chasing product. These new exotic ETFs that are coming onto the market, are usually coupled with higher costs and generally are riskier investments. In our opinion its best to lay off of the newest ETF fads and stick with funds with solid track records.
As the ETF market continues to grow, try to avoid fancy headlines and promising market slogans and most importantly, don’t invest out of your risk tolerance. ETFs are great investments as they can anchor a portfolio fairly cheaply, but try not to make continuous small investments, which will rack up commission costs. As a general rule, commissions should be around 1% of your total investment and remember to be picky when it comes to choosing major index ETFs because some will come with expense rations as low as .09. $
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Comments
@ Blake - I really like SHARE S&P 500 INDX
(NYSEArca: IVV) It’s expense ration is 0.09% and using Sharebuilder, it’s not costing a lot to keep purchasing.
I agree with mutual funds, what role will these play in the coming years? Although with the passing of the automatic enrollment into retirement plans, many investors will be automatically put into mutual funds, keeping the industry strong I’m guessing.
pssssst. Just an FYI I nominated you for the Pay it Forward award. Its just a fun little thing between pf blogs.
I’ve added the Vanguard Total Stock Market ETF to both my regular portfolio and my IRA, and I’ve been really happy with it so far. Like you say, it’s a really easy way to diversify and create a solid foundation for your portfolio. Have you added any yet?
It makes you wonder what will become of mutual funds. Other than some really specific funds, it’s almost a no-brainer to go with ETFs over typical funds any day, imho.