Topic: ETFs

How do you find out what are good ETF investments for maximum portfolio growth? Here’s what to look for

What are good ETF investments? Learn how to find the best of them so you can better position your portfolio for superior long-term gains

Top-quality stocks (and ETFs that hold those stocks) tend to lose less of their value in the kind of severe market setback we’re experiencing today. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks and ETFs we continue to recommend in our newsletters.

To build a portfolio of those stocks/ETFs—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

  1. Hold mostly high-quality, dividend-paying stocks/ETFs.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks or ETFs in the broker/media limelight.

All in all, we still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio.

Here are the ins and outs of finding good ETF investments to add to your portfolio:

How to Make Money with ETFs

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Learn what are good ETF investments and how they can best fit into your overall investment strategy

Diversification is one of the most attractive features of ETFs. They let investors hold a wide group of stocks with one investment.

ETFs are typically more tax-friendly and cheaper than mutual funds, and the best conservative ETFs offer low management fees and high-quality stocks.

Overall, we think you should stick with “traditional” ETFs. Traditional ETFs follow the lead of whoever sponsors the index, such as Standard & Poor’s, although the sponsors do from time to time change the stocks that make up the index. They also can tinker with the rules for calculating the index.

ETFs change their portfolio holdings to reflect these changes, without directly considering the impact those changes may have on the performance of the ETF portfolio.

However, when an investment product faces booming demand as ETFs do today, investment companies try to expand sales by creating “new” versions of the underlying formula.

These “new” ETFs use a conventional stock-market index as a base, but add their own refinements. These refinements are often tailored to current investor trends. That’s distinctly different from traditional ETFs, which, as mentioned, simply aim to mimic an index. These newer, theme varieties may attract attention—and sales—but they frequently carry higher management expense ratios (MERs).

In some cases, the strategies of the new ETFs may provide investment benefits but not consistently. In fact, they will most likely hurt your results in the long run. The worst cases are bad enough to turn investor profits into losses. One sure result is that the higher MERs will cut into the value of your ETF portfolio every year.

Another drawback with many new ETFs is how much easier they make it for investors to act on an urge to invest in a specific stock or stock group—without doing any messy and time-consuming research. For example, if you want to invest in, say, cryptocurrencies or Swedish stocks or wind-power stocks, or any of hundreds of other stock groups, you can almost certainly find an ETF that will let you act on that urge. However, that may not produce the best overall portfolio results.

Aggressive ETFs can play a role in your portfolio, but use caution

You should avoid aggressive ETFs that mainly invest in stocks of companies that are mostly in the concept stage, or that do a lot of trading, or that delve into options or futures trading and so on.

These aggressive ETFs are only suitable for investors who are willing to accept higher risk—and the most speculative of them will likely lose money for you

Our aggressive ETF selections tend to hold stocks that are more highly leveraged and more volatile than our conservative recommendations, They can give you bigger gains, but also bigger losses. This may be due to high debt, or to the risk in their industry or particular situation, or our estimation of upcoming changes in that risk. Keep in mind, though, that these or any aggressive investments should comprise only a smaller part of an investor’s portfolio.

Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances. An investor with a longer time horizon or without the need for current income from a portfolio can invest some money in aggressive ETFs.

What do you think will happen with the evolution of the ETF market as more actively managed ETFs enter the market?

What is your impression of actively managed ETFs?


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