You’re ready to start investing, and ETFs (exchange-traded funds) can quickly help you build a solid, diversified portfolio. The trick is choosing the best funds for you out of the thousands of ETFs on the market… and it’s easier than you think.
Most ETFs follow benchmark indexes, similar to index mutual funds. That passive style lets ETFs charge very low expenses, making them a very cost-effective investment choice. But it’s still important to know the expense ratio of any ETF you’re considering, and how that stacks up against similar funds. But expenses aren't the only factor to look at when you’re choosing an ETF.
Thanks to reliable financial research firms, you can screen the ETFs that match up with your financial action plan in very little time – and time is something we single moms value as much as investment returns. Here are a few easy-to-navigate screeners you can use:
Most brokerages (like Vanguard, Charles Schwab, and eTrade) also offer ETF screening tools.
So what should you look for when you’re screening ETFs?
These 6 simple tips will help you weed through the pile, and choose ETFs to help build your personal wealth.
- Age matters. ETFs are relative newcomers to the investment world, and new funds crop up all the time. Make sure any ETF you’re considering has been around enough to have a long-term track record.
- Know the index. There are hundreds of indexes out there, and they vary very widely, so make sure you know the types of holdings the index tracks. If you’re new to investing, broader indexes (like the S&P 500) give you more diversification than narrower niche indexes (like S&P Tech Stocks).
- Check the tracking difference. Most of the time, ETFs match up very closely with their index. Sometimes they don’t, and that’s called a “tracking error.” An ETF with a large tracking error means you may not be getting the underlying investments you’d expect from the named index – and that means it might not perform as well, either. If the index you’ve chosen goes up by 12%, you want your ETF to do the same. So when you’re choosing an ETF, the closer it track with its index, the better.
- Check out the trading volume. ETFs trade over the stock market, so it’s important to know that your ETF’s market is active – that means lots of people are buying and selling shares regularly. Why does that matter? Because when you’re ready to sell ETF shares, you want there to be plenty of buyers so you can lock in the best price. Look for a fund that’s trading millions of shares every day.
- Size matters. In the world of ETFs, size matters – the total assets held by the fund. The most liquid (meaning easily sold) ETFs have at least $10 million in assets. Funds much smaller than that may not have as big an audience, which can lead to big price swings and a higher risk of loss. So if you’re looking at a smaller ETF, make doubly sure it has a steady high trading volume.
- Sidestep trading fees. Since ETFs are bought and sold over the stock exchange, transactions usually come with trading fees, and those can range from $5 to $50 depending on your broker. You can sidestep those commissions by choosing no-fee ETFs offered by your brokerage firm. For example, both Vanguard and Charles Schwab (along with many other firms) offer a wide variety of commission-free ETFs to their account holders.
Bottom line: With these 6 tips and the easy-to-navigate screening tools we talked about, you’ll be able to find the best ETFs to fit into your financial action plan without breaking a sweat.