As with most things, it is generally wise to start with things you are familiar with and understand first, then branch out to other things as your interests and portfolio warrant it. So the best way to get started with ETFs is to become aware of what is available. Generally, I separate the ETF market into three broad categories:
- Equity ETFs
- Bond ETFs
- Commodity ETFs
Now within each broad category there is generally a broad selection and no shortage of creativity on the part of the issuers. There are bull market ETFs that follow the uptrend of the market. There are bear market or inverse ETFs that are constructed to follow the downtrend of the market. There are leveraged ETFs that are leveraged to double or triple the market’s average move. There are sector ETFs that follow a basket of stocks in a particular market sector like technology or real estate, for example. In the category of Index ETFs, there are ETFs that cover large caps, medium caps, small caps, international index funds and emerging market funds. The choices almost seem endless and just when you think you know them all, more ETFs pop up. Especially with the international ETFs, while the U.S. ETF market is fairly mature, the international markets are just getting started.
My best advice to those getting started in ETFs is first, start with something you know and are familiar with. If you are involved and have knowledge of certain industries, say “high tech” look at one of the Technology Sector ETFs. If you follow the broader market, a good index fund could be the place to start. If you are looking for international growth, look to one of the established international equity index funds. Secondly, make sure you know the “true” objectives and goals of the fund. With so many ETFs now available, be sure to check out the fund’s holdings with a little bit of research. Sometimes the official title of the fund can be a bit generic or the funds can alter their course from their original objectives. One can find out much about a fund with a 10 second search on the internet and can save a lot a second guessing and stress down the road. But a word of CAUTION concerning “leveraged” ETFs, some have performed very well in the most recent market rally, but as always, what goes up quickly can do down just as fast or faster, when the market reverses and all your profits can quickly evaporate, so beware!
So like any investment, first identify your investment objectives. Make sure your objectives are clear and practical. Second, do your homework to make sure what you are investing in will meet your objectives! Third, don’t put all you “eggs in one basket,” in other words, even in the ETF world, spread you risk around by diversifying, so that you are not putting all you money into just one or two Funds. Portfolio Risk Allocation rules should be used when investing in any market including ETFs. With so many choices, have fun with the huge variety of funds. ETF investing can become enjoyable as well as profitable. Remember to enjoy the journey as well as the destination and ETFs are a good place to start.