Choosing the ideal ETF for your investment portfolio depends very much on your objectives, current risk exposure, available capital, and areas of expertise. This is because varied factors, such as how long should you hold an ETF, will necessarily differ between investors based on their strategies.
Learning how to use Motley Fool Stock Advisor or an alternative growth stocks newsletter can be useful, highlighting ETFs and other opportunities with strong potential. The best investment advice during recession, and within periods where global economies are inflationary, is to focus on long-term, sustainable growth while staying true to your established investment goals and entry or exit triggers.
How to Choose a Great ETF
ETFs are a popular investment option to engage in varied assets across a mixed fund, diversify to rebalance overexposure elsewhere in your portfolio, and secure ongoing capital growth while benefiting from dividend income. Among the best ETFs, advisers recommend looking at:
- Well-established ETFs with significant assets under management
- ETFs that track exchanges or indices, such as the S&P 500, Nasdaq 100, and S&P SmallCap 600
- Funds with a large volume of blue-chip stocks across either varied international trading environments or within the US
It is also important to evaluate the expense ratio of any potential ETF because this will directly affect your annual fees based on the capital invested. For example, the average expense ratio is 0.78%, equating to fees of $78 for every $10,000 invested. The lowest ratios can be as little as 0.03%, representing excellent value, particularly for larger investments.
What Factors Make an ETF Successful?
As we’ve indicated, success is a subjective metric. For any investment to be a good choice, it must be the right product, with sufficient infrastructure and capital support to offset risks to your defined requirements. Newer ETFs are inherently less stable because without a track record, or a secure asset base, many funds end up closing within two years – more established ETFs are much less exposed to failure.
In comparison, roughly 38% of ETFs close within three years of launch, in contrast to 2% of funds with sixteen or more years as investable assets. Investors looking for liquid assets should think about the liquidity of any potential ETF because those with high trading volumes and millions of share trades per day are easy to buy and sell, with a smaller bid-to-ask spread, without restrictions on exit opportunities.
The asset base linked with an ETF is influential because funds with at least $10 million in assets are far more likely to attract investor interest and avoid wide spreads and low liquidity that may be incompatible with your expectations.
Avoiding Risks in ETF Investment
Every investment carries a balance between risk and reward. Although ETFs are often considered more stable than alternatives, assessing the possible loss exposure of any new investment remains essential.
Investment is not the same as active trading, and the norm is to treat an ETF as a medium to long-term investment rather than getting sidetracked by attempts to time the markets or second-guess emerging sectors to jump into a trend. One of the biggest risks in ETF trading is escalating costs, and extracting value from your portfolio, so choosing funds without caveats in terms of liquidity and returning to your investment objectives will help you make sound investment decisions.