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The statistic from Statista shows that even in 2023, 61 percent of American adults invested their money either directly in the stock market. Here are some things you should know about money working for you, so you can grow your wealth. If you need yours to work for you and help you build up an income, you’ll want to do the same.
However, you may not always be in a position to determine which company to invest in as you may not have the time to make your own investigation and research pertaining to the particular asset or sector. This is why many investors will place their money in an exchange-traded fund (ETF), which is simply a pool of companies gathered under one fund that is traded on an exchange, just like stocks are.
So, when you decide to invest directly in an ETF, you just acquire a bunch of assets in various sectors, markets, or even countries. One ETF allows you to own a basket of various companies in one fund and the fund itself is most often released by a financial company. You simply want to know how to acquire the most suitable ETF portfolio for your investment requirement.
Here are some things that investors should consider when trying to decide which of the thousands of ETFs available in the market are the best ones to include in their investment portfolio.
The Expense Ratio
In the case of ETFs, the expense ratio refers to the annual charges that are made by the provider of the ETF for managing the fund. The more expense ratio is low, the less money is charged, and a bigger proportion of the returns is provided to your account.
“Due to the fact that ETFs are traded intraday at prices that may not reflect the net asset value, it is always crucial to look at the expense ratios as well as trading/transaction charges of any fund to be invested,” Werner stated. “Accomplishing knowledge regarding costs is a very important stage in implementing that non-recurrent charges do not erode investor’s profits in the long run.
To the expenses notice, what you will need to do is to take note of the fees and see if they are okay for you. While it may be possible in some cases that you had the fund at higher expenses and will have higher returns, then you want to be sure that it is worth it.
The ETF’s Objectives
This means that as you look for an ETF as an investor, you are keen to make sure that the fund’s objectives are in sync with your goals as an investor financially as well as in terms of risk-taking abilities. Every fund has some or the other objectives with it and hence you would like to make sure whether this will work for your portfolio depending on the time-line which you may possess.
In any case, Werner further stated, “It entails reviewing the asset class, geographic location, and the index designed to be targeted by the ETF in question.”
Liquidity
The flowing part of an ETF has to do with everyone’s capability to purchase shares of an ETF and/or sell shares without affecting the price per share. These professionals advising on the financial field suggested knowing the liquidity of ETF so that one can also think about it.
“Analyze the ETF’s level of liquidity, with reference to the average daily trading volume and a bid-ask spread,” as suggested by Taylor Kovar, CPF, and the founder of 11 Financial. “Higher levels of liquidity hence reduce the bid offer spread, thus reducing the cost of transacting business and providing better prices.”
By looking at the historical performance of the ETF specifically on the daily ranges and the weekly oscillations, it is quite visible that it driving a high traded volume.
Historical Performance of the ETF
Historical performance, while not an absolute predictor of the future results, will provide an understanding of how the fund performed in the past by applying the data gathered.
Kovar added, “Check on the past performance of the ETF against the benchmark index, and similar investment vehicles.”
If the fund is doing better than what the index formulates, it may be wise to include this in your portfolio because the result is already there. In this case, if the fund’s returns have been scarce or poor, prospective investors may ask themselves why they should risk their cash on such poorly performing fund.
Risk Tolerance
It means you need to find the ETF that matches your tolerance level of their price volatility for the securities they invest in. This will also depend on the type of sector or industry which you may fancy to invest in.
On the recommendation of Kovar, investors should acknowledge the following with regards to ETFs; “Select the right risk profile whether you are looking to invest for growth, income, or capital preservation.”
Investing requires one to understand its industrial focus so that the company under the fund is aligned to the risk tolerance so as to buy the correct securities into the investment pool.
If the fund is active or passive
You’ll also want to identify if the fund investment strategy is active or passive since this makes a difference in assessing whether it’s actively seeking to outperform said index or is a product that just tracks and generates index returns.
“Even if you use an advisor, one should be very careful of the active investment use because, for the average investor, the long-term historical record suggests that the passive strategy is beneficial unless otherwise,” Tyler Johnson, CFP at Still Water Financial Advisors said.
Some of the ETFs out there are active which means that you’d like to be confident in how these ETFs are managed so that you do not end up aggravating yourself with your investment portfolios.
Johnson extended his thoughts on the active vs passive ETFs, he said “If passive; then selecting the lowest ongoing fees with the least tracking error tolerance (index returns – ETF cost vs ETF returns).”
Specific Holdings
If you’re choosing between two funds within the same industry, then you should probably pay attention to detail in a sense that you should compare the holdings. Being a category of funds that publishes their portfolio each trading day, you can check what the fund says regarding its constituents to see whether it fits the bill or not.
Werner’s recommendation was, “It is more helpful to compare the specific individual components that make up an ETF so that one can be in a better position to proactively identify which stocks/funds are being chosen to bring about a positive result for the specific ETF.”
You don’t want to feel that the asset chosen does not fit your expectations or that the proportion allocated to that particular asset class is not suitable. There are two things you should not just focus on, but also focus on the weights of those securities when it comes to the ETF holdings.