Exchange-traded funds (ETFs) are an increasingly popular way for new investors to get started in the world of investing. Unlike traditional mutual funds, ETFs trade like stocks and offer a low-cost, diversified approach to investing. But with thousands of ETFs available, it can be challenging to know which ones are right for you. To help make it easier for you, here are some key questions I recommend answering before selecting your ETFs.
- What type of ETF do you want?
The first step in choosing an ETF is deciding what type of investment you’re interested in. There are ETFs that track stocks, bonds, commodities, currencies, and more. Think about your investment goals and what asset class you want to focus on. - How broad or narrow do you want your portfolio to be?
ETFs come in different sizes and shapes, and you need to decide how broad or narrow you want your portfolio to be. Some ETFs track entire markets or sectors, while others focus on specific industries, countries, or regions. Consider the level of diversification you want and choose ETFs that match your investment strategy. - Do you prefer large, established companies or smaller up-and-coming ones?
ETFs can be either passive or active, and the types of holdings they contain can vary widely. Some ETFs track indexes that focus on large-cap stocks, while others invest in small-cap or mid-cap companies. Consider the level of risk you’re comfortable with and the potential rewards you want to achieve. - What currency do you want to use for your investment?
If you’re investing in an ETF that trades in a foreign currency, you need to consider the potential impact of currency fluctuations on your returns. Some ETFs are hedged against currency risks, while others are not. Think about your investment horizon and whether you want to hedge against currency fluctuations. - Research the ETFs you’re considering.
Once you’ve narrowed down your choices, research the ETFs you’re considering in more detail. Look at their holdings, fees, trading volume, and past performance. Check out the prospectus and any other available information to get a better understanding of the ETF’s investment strategy and risks.
Remember, it’s important to diversify your portfolio with multiple ETFs to reduce risk and maximize returns. By answering these questions and doing your due diligence, you’ll be on your way to selecting the right ETFs for your investment goals.