Exchange Traded Funds (ETF’s) have become an increasingly important component in investor’s portfolios. With the increase in popularity, this has of course led to an increase in the number of ETF’s available, which can make choosing one from another a difficult task. As of January of 2014, there were over 1,500 ETF’s available in the U.S., with over $1.7 trillion in assets. Some key components that you will want to carefully evaluate are:
1. Who is the provider of the ETF? How long have they been in business? How much assets under management (AUM) do they have?
2. Liquidity. What is the average daily volume of both the ETF and the underlying basket of securities? Has liquidity been affected in previous stressed markets?
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3. Exposure. How closely has the ETF tracked its benchmark? Does the ETF employ leverage? Is the investment objective clearly stated? How widely followed is the index?
4. Structure. What type of securities does the ETF hold? Does the ETF use derivatives? Is the ETF an independent fund, trust, unit investment trust (UIT), or a share class of a traditional mutual fund. Are options available on the ETF?
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5. Costs. What is the expense ratio? What are the trading costs? How does the ETF rebalance? Do I pay a commission if I buy?
It is also important to evaluate asset location of your ETF’s. (e.g. Taxable vs. Tax Deferred accounts). Is the asset category an area that tends to be historically very efficient such as Domestic Large Cap stocks or does looking for an active manager add incremental value?
As always, if you find you need help and assistance, we recommend speaking to your financial and or tax advisor for more specifics to help you determine if investing in ETF’s should be a part of your overall investment strategy.
To discuss how this subject or other financial subjects may relate to your own financial circumstance, please contact me at the contact information below:
President, Investment Advisor
Core-X Wealth Management, LLC
900 Walt Whitman Road, Suite 208
Melville, NY 11747
631-923-2485 Phone
This communication is from Chris Congema, CFP®, President and Investment Advisor of Core-X Wealth Management, LLC, a New York State Registered Investment Advisory firm, located in Melville, NY. The information in this blog is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax, legal, or investment advice from an independent professional / financial advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
