Save more, spend smarter, and make your money go further
The appeal of Exchange Traded Funds (ETFs, for short) is simple: They trade like stocks, but contain a basket of assets, much like a mutual fund.
This provides instant diversification, without the need to research every last stock or bond.
For example, an S&P 500 ETF covers all (or most) of the stocks on the Standard & Poor’s 500 Index, giving you exposure to a greater variety of U.S. equities than most people could otherwise invest in conveniently.
But there are other benefits to ETFs, such as low fees and expense ratios (these can eat away at your earnings, if you’re not careful), and no or very low investment minimums.
Plus, you can trade many ETFs for free if you buy them straight from their source; Fidelity and Vanguard are two good examples of asset managers that offer many top-rated ETFs which cost zero to trade.
Knowing which ETF is right for you is a personal matter. Like any investment, it depends on your overall financial picture, risk tolerance and goals.
The ETFs below provide a good starting point for both novice investors and those interested in what’s hot now.
Target-Date ETFs
Like the Target-Date Mutual Funds your employer probably offers as part of your 401(k) plan, the similarly-named ETFs are designed as a single investment for retirement savings.
Target-Date ETFs re-calibrate their asset mix over time, investing in higher return (but riskier) stocks earlier in your career and shifting toward lower-risk investments as you near retirement.
You select a fund based on your expected retirement date – a 30 year-old would select a 2044 or 2045 Target-Date ETF, for example – and the fund does the rest of the work for you.
Target-Date ETFs are an excellent core holding of the sort most investors would be wise to own.
Their major weaknesses are three-fold, however: First, they may offer less diversification and control than you may want for your total portfolio.
That’s no great crime, however, assuming you feel comfortable choosing other investments to complement its mix.
Second, as your financial picture shifts, you may need to re-balance your portfolio.
This requires understanding what’s in your ETF (or any of your investments, for that matter), and may imply more research or legwork than you were prepared for.
The odds aren’t you probably won’t be able to just sock money away and forget about it – you’ll probably need to keep a closer eye than you’d expect.
Finally, ETFs in general aren’t tax advantaged – a fact that’s doubly important when considering retirement savings, since other options like a 401(k) do offer tax benefits.
Assuming you don’t already have a Target Date Mutual Fund as part of your 401(k) – or want to supplement it – there is a way around the tax advantage issue: Open a self-directed IRA and invest in a Target-Date ETF of your choice.
Gold ETFs
I know, I know, we’ve all seen the questionable, borderline-predatory infomercials imploring unsuspecting investors to buy gold.
But gold has an important role in most portfolios, as a recent paper by Hussman Funds suggests.
It can help counter declines in other asset classes, such as the stock market, and helps protect you from inflation.
Gold ETFs have been on a tear this year, too.
According to ETF Database, they’re among the year’s best performers, with some returning over 30% year-to-date.
While these ETFs (and gold, in general) have been in decline over recent weeks, that doesn’t change their long-term strategic benefits as part of a diversified portfolio.
It may signal a buying opportunity, especially if the market begins to expect equities will decline and interest rates increase.
Soft Commodity ETFs
So-called “soft” commodities, such as coffee and wheat have been on a tear this year, as droughts in Brazil and political difficulties in Ukraine have tightened exports and sent prices soaring.
In fact, ETF Database shows the top coffee ETFs (and similar Exchange Traded Notes) yielding over 50% year-to-date.
Soft commodities’ dramatic returns may not last much longer, but if you’ve got the cash to spare and a desire to take a bet on the moment’s truly hot commodities, these ETFs should be near the top of your list.
Biotech ETFs
Biotech ETFs have been getting hammered recently, and perhaps for good reason: After last year’s dizzying ascent (with many returning over 50% in 2013), investors are beginning to wonder if the sector is overvalued.
But there’s evidence that on a historical basis, at least, biotech stocks aren’t overvalued and that the sell-off is unwarranted.
That may make this a good time to get quality biotech exposure on the cheap, while they’re being unfairly hammered.
Biotech is a fairly speculative sector not well-suited for novice investors or the faint at heart. Though the returns can be grand, the risk is also much greater.
Generally speaking, younger investors (with a greater time horizon until retirement), and those with a higher risk tolerance should benefit most.
Janet Al-Saad is the founder of the Five Ten Twenty Club, a website designed to help you improve your finances $5, $10 or $20 at a time.
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Source: mint.intuit.com