Exchange-traded funds, or ETFs, are popular alternatives to investing directly in stock mutual funds or individual stocks.
An ETF is an investment fund that owns assets such as stocks, bonds, commodities, currencies, or a basket of stocks.
The ETF’s ownership is divided into shares just like stocks are, and the fund is traded like a stock on an exchange.
The most popular ETFs track an index such as the S&P 500 Index or NASDAQ Index, or a commodity such as gold.
ETFs have become very popular in the last decade with stock and bond investors due to their flexibility, diversity, and low fees. With just a few ETFs, an investor can build a diversified portfolio or invest in specialized areas.
They are great alternatives to higher cost and less tax-efficient mutual funds.
Stock mutual funds average 1.42 percent in annual expenses, while the average stock ETF charges just 0.53 percent.
This difference over many years can total tens of thousands of dollars, or hundreds of thousands of dollars on a large account. This is money that stays with you rather than goes into the mutual fund’s pockets.
ETF.com, a relatively new site, is a great free source of information for ETF investors.
For beginners, they offer a Guide To ETFs that walks through the basics of ETF investing.
But the real value of ETF.com lies in the reports it publishes about each ETF. The reports are in plain English, which makes it really easy to use for those without a financial background.
And best of all, the reports are free and do not require any sign-up or subscription.
All you need to do is simply enter an ETF’s ticker symbol.
After you enter an ETF’s ticker symbol you will see its rating and a score.
Ratings range from A to F. A rating of A or B is considered good, but any rating below that points to some major problem or issue with the fund.
The score is determined by three factors they called Efficiency, Tradability, and Fit (ETF). These three factors measure how well the ETF delivers on its stated goal, its liquidity (the ability to handle large-scale buying or selling), and how it compares to its underlying investments in terms of risk and performance.
Each ETF’s page also includes an overview, its performance, its expense ratio, yield and ex-dividend dates (if the fund pays a dividend), the top 10 holdings of the fund, charts, a link to the fund’s home page, and more.
Be sure to run a report for any ETF you are considering investing in as part of your due diligence!
You’ll learn exactly what the ETF is investing in. Best of all, they list some pros and cons that you may not be aware of. This can be invaluable information.
I personally don’t find their number rating system all that useful. For example the PowerShares QQQ is a very popular ETF that tracks the NASDAQ 100 stock index. It only receives a score of 63 out of 100.
The low score is due to receiving only 63 out of 100 on the Fit measurement.
Under the Description section you can learn the reasons the fund received the score it did. For QQQ they state that it only invests in nonfinancial stocks listed on the NASDAQ. And that Apple comprises 13% of the portfolio.
The fit is not ideal because, “QQQ tilts much larger than our benchmark and is much more concentrated in its top holdings.”
So don’t let a poor score put you off. The low score doesn’t necessarily mean it is a poor investment. Just make sure to read through the descriptions to see if the ETF you are considering meets your investing objectives, and to alert you to any issues with the fund. Use a low score or rating as your stepping stone to learning about potential drawbacks to the fund that you weren’t aware of.
Of course, keep an eye on a fund’s expense ratio. It should ideally be under 0.50 percent. The lower the better!
Check out ETF.com today!