Choosing the Right ETFs
When it comes to figuring out which ETFs make sense for your portfolio, the process is very similar to mutual fund selection. The first thing you need to do is revisit your financial plan. Your immediate and long-term goals, your current holdings, and your feelings about risk will all inform your ETF choices.
You'll also want to consider the expense situation. If you choose a broad-based ETF that holds basically the same securities as an index mutual fund, carefully measure which one will cost you the least to own, remembering to take trading costs into account. There's no reason to buy the ETF if a no-load mutual fund will offer you the same returns at a lower cost. You'll also want to check the current trading prices; while mutual funds are bought and sold at their net asset value, ETFs often trade at premiums or discounts to the NAV, based on the day's market activity.
Also consider the different fees charged by different ETF families. Competition among ETFs is increasing as more players come into the market, and one way to draw new business is to lower fees. Compare like ETFs to see which offers the best expense ratio, especially if you plan to add only one of these securities to your portfolio.
Asset allocation ETFs can take all the guesswork out of investing. Just like their mutual fund cousins, these relatively new ETFs hold more than one class of securities, such as stocks and bonds. That allows investors to hold a single ETF for a fully diversified portfolio.
As you're looking into different ETFs, you also want to make sure that you're putting your investing dollars into good hands; not all ETF sponsors are alike. Make sure the ETF you're considering holds a least $10 million in assets, as smaller offerings may not be as liquid (meaning you may have trouble selling when you want to). Also, look into the trading volume of the fund you're interested in, as that will also tell you how easy it will be to sell when you're ready. Popular ETFs see volume in the millions every day (meaning more than one million shares exchange hands daily), while others may see virtually no trading activity at all.