You may already have experience investing in individual stocks or bonds or mutual funds. What’s another option? Exchange-traded funds, or ETFs.
What are ETFs? ETFs are basically mutual funds that trade like stocks. Similar to regular mutual funds, which hold shares of multiple companies, ETFs contain shares of a variety of companies.
ETFs may be passively or actively managed, although the majority of them are passively managed and based on indexes such as the Standard and Poor’s 500 (S&P 500). (Actively managed funds have a fund manager who monitors them and may trade regularly.)
So who’s a good candidate for ETF investing?
“If you want to diversity your portfolio and don’t have a bond market fund, or if you want a global stock fund, there’s a really good way to do that through ETFs,” advises financial journalist John Wasik.
Wasik, coauthor of “iMoney: Profitable ETF Strategies for Every Investor,” says investors benefit when buying bonds through an exchange-traded fund because they don’t have to worry about the differing maturity dates of the bonds. The fund does it for you.
While this is true, and it saves the average investor some hassle, it may be worth it to compare bond ETFs with bonds bought directly from the source, such as the U.S. Treasury.
Tips for ETF Investors
Wasik offers these tips for investors who are just starting to buy ETFs:
“First of all, make sure you have the largest part of the U.S. market covered. And don’t think the U.S. market is only the Dow Jones Industrials or the S&P 500. Find an ETF that really samples the Wilshire 5000 Index. One of the best funds for that is called the Vanguard Total Stock Market ETF (VTI).”
“Make sure that you are sampling the U.S. bond market.” Wasik recommends iShares Lehman Aggregate Bond (Exchange Traded) Fund (AGG).
“A stock index and bond fund are the two basic core holdings that you should focus on.”
“You should have some investment in energy, minerals and commodities in an index fund,” Wasik says.
“Other than that, make sure your portfolio is protected from inflation.” Wasik suggests having some Treasury Inflation-Protected Securities (TIPS), preferably through an ETF.
“I’ve always found that inflation is the biggest enemy of most people’s portfolios: you have to make up for it somehow, and you can’t make up for it through your salary most often.”
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Oct. 13, 2008.