10 Ways to Be a Better ETF Investor in 2015
It’s another year, another new calendar and another new set of challenges for investors.
Indeed, this time of year everyone is looking to make resolutions and to implement new ways to be better people in the year ahead. And while I can’t really help you with common resolutions like eating better or exercising more, I can help you to be a better exchange-traded fund (ETF) investor in 2015.
Here are 10 ways to do just that in the year ahead.
I think 2015 is going to be a very interesting year, so be sure to tune in here every week to make sense of it all.
ETF Talk: Featuring the Biggest ETF Kids on the Block
The world of exchange-traded funds (ETFs) is tremendous and rapidly growing. As a result, there is a fund for nearly every niche or idea you can imagine. Investors today have an expansive freedom of choice in this area, yet many make similar choices. As it turns out, there is a relatively small group of funds that hold a very large share of all assets invested in ETFs. Upcoming ETF Talks will elaborate upon the 20 most popular ETFs in the market.
This list of 20 out of the thousands of ETFs available represents 40% of all assets invested in ETFs! This means that they are some of the most well known funds out there. Thus, it’s important that an educated investor be aware of the opportunities that ETFs represent and how they work.
The huge quantity of assets invested in these funds demonstrates how big an impact ETFs have had on investing. These 20 funds hold a combined total of more than $2 trillion. For reference, that’s more than 11% of the United States’ 2013 GDP.
The largest funds on the list tend to follow well-known market indices and invest in the domestic market, such as SPDR S&P 500 ETF (SPY); international markets in general, such as iShares MSCI Emerging Markets Index (EEM); or even both.
Relatively smaller entries further down the list are more diverse. These funds focus on subsectors or specific investment directions, such as Vanguard REIT ETF (VNQ) and iShares S&P MidCap 400 Index (IJH). The table of all these funds, along with data on their 2014 performance and assets held, can be found below.
Ticker | Name | Type | YTD% | Yield (IND) | Assets (MLN) |
---|---|---|---|---|---|
SPY | S&P 500 SPDRs | Large Cap Domestic | 12.09 | 2.19 | 201,539 |
IVV | iShares S&P 500 Index | Large Cap Domestic | 12.94 | 1.78 | 69,854 |
EFA | iShares MSCI EAFE Index Fund | Intl/Global Equities | -7.55 | 1.89 | 52,833 |
VTI | Vanguard Total Stock Market ETF | Large Cap Domestic | 11.14 | 2.10 | 50,550 |
VWO | Vanguard Emerging Markets ETF | Emerging Market – Broad Market | -2.73 | 1.74 | 47,986 |
QQQ | PowerShares QQQ | Large Cap Domestic | 19.33 | 1.48 | 40,139 |
EEM | iShares MSCI Emerg Mkts Index | Emerging Market – Broad Market | -5.77 | 2.72 | 31,650 |
IWM | iShares Russell 2000 Index | Small Cap Domestic | 3.51 | 1.02 | 29,733 |
GLD | streetTRACKS Gold Shares | Commodities – Metals/Miners | -2.72 | 0.00 | 27,840 |
IWF | iShares Russell 1000 Growth Index | Large Cap Domestic | 12.59 | 1.14 | 27,626 |
VOO | VANGUARD S&P 500 ETF | Large Cap Domestic | 12.28 | 2.16 | 26,543 |
VNQ | Vanguard REIT ETF | Real Estate | 26.83 | 5.39 | 26,522 |
IWD | iShares Russell 1000 Value Index | Large Cap Domestic | 12.11 | 1.80 | 25,979 |
IJH | iShares S&P MidCap 400 Index | Mid Cap Domestic | 8.69 | 1.23 | 24,317 |
VEA | Vanguard Europe Asia Pacific | Intl/Global Equities | -7.49 | 2.49 | 23,976 |
BND | Vanguard Total Bond Market ETF | Aggregate Bonds | 3.40 | 2.41 | 23,940 |
AGG | iShares Lehman Aggregate Bond | Aggregate Bonds | 3.76 | 2.06 | 22,945 |
VIG | Vanguard Dividend Appreciation ETF | Domestic Dividend | 8.72 | 2.24 | 21,066 |
XLF | Financial Select Sector SPDR | Financials | 13.22 | 2.04 | 21,049 |
LQD | iShares iBoxx $ Liquid Invest Grade Bond | Corp Bonds | 4.80 | 3.36 | 19,076 |
Data as of 12/22/14
This table provides a roadmap for the next few months of ETF Talks. When we complete this series, you will be knowledgeable about the most popular funds in the rapidly growing ETF market. Check back next week for a look into SPDR S&P 500 ETF (SPY).
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.
The Most Common ETF FAQs
I get a lot of questions every day about ETFs. So, this week I decided to compile a list of the top most frequently asked questions (FAQs) to help investors understand the basics of ETFs and how they work. So, here you go!
1) What is an ETF?
An ETF, or exchange-traded fund, is an investment fund traded on stock exchanges. An ETF holds assets such as stocks, commodities or bonds. Most ETFs track an index, such as the S&P 500 or Dow Industrials, etc.
2) What are the advantages of investing with ETFs?
There are many advantages of investing with ETFs. The primary advantages of using ETFs include their low cost, ease of use, transparency, wide variety of choice, tax efficiency and liquidity.
3) What are the disadvantages of using ETFs?
ETFs do require some specialized knowledge to understand how to use them successfully. In some cases, they can be more complicated than mutual funds. When purchasing an ETF, you also incur a transaction fee. If you are making small purchases month after month, over time those fees can reduce your total return. There are more than 1,600 ETFs listed on U.S. exchanges, so the sheer number alone can be intimidating for some investors.
4) Where, and how, do I buy ETFs?
The purchase or sale of ETFs is done through a brokerage account. Popular national brokerage firms such as Fidelity, Schwab, TD Ameritrade and Vanguard are good choices for your brokerage account. Once you have a brokerage account, you can follow that investment firm’s instructions to buy and sell ETFs online.
5) What are the main differences between ETFs and mutual funds?
ETFs are priced throughout the trading day, while mutual funds are priced just once a day at the close of trading. ETFs are completely transparent, meaning you always know what an ETF holds. Mutual funds are only required to report their holdings quarterly. ETF purchases do involve a transaction fee, but there are no sales charges or deferred sales charges like there are with mutual funds. ETFs also are much cheaper, more tax efficient and offer far more choice than mutual funds.
6) What are some common mistakes made when investing with ETFs?
Investing involves risk, and using certain ETFs (e.g. ETFs that use leverage) can be inappropriate for some investors. Some small, i.e. thinly traded, ETFs have wide bid/ask spreads. This can cause investors to buy at a high price and to sell at a low price. ETFs require some specialized trading knowledge to sidestep these and other mistakes. Educating you on how to avoid these mistakes is one of the missions of Doug Fabian’s Weekly ETF Report.
7) Are ETFs for stocks only?
No. ETFs allow investors to allocate to stocks, specific market sectors, foreign stocks, fixed income, commodities and currencies. The growth in the number and variety of ETFs over the past several years means that almost every type of asset class that is publicly traded now is accessible with ETFs.
8) Do ETFs pay dividends and interest like mutual funds?
Yes. ETFs pass through dividends paid from stocks, as well as interest from fixed income securities, directly to shareholders. Distribution frequency varies depending on the ETF, as some ETFs pay monthly while others pay quarterly or semiannually.
9) What are the tax advantages of using ETFs?
ETFs offer greater tax advantages to shareholders than mutual funds. Because most ETFs are structured like an index fund, there is an extremely low turnover rate in the holdings when compared to mutual funds. It is the buying and selling of assets within a mutual fund that tends to create tax issues, but there is very little of that when investing with ETFs.
10) Are there costs and sales charges when purchasing ETFs?
When purchasing an ETF, you likely will incur a transaction fee that is charged by your brokerage firm. While there are no sales charges, commissions or redemption fees associated with ETFs, you likely will have to pay the small transaction cost associated with buying and selling any asset.
If you have questions about anything ETF related, just send me an e-mail.
Buddha on Time
“The trouble is, you think you have time.”
–Interpretive Buddha quote
What’s the message of this bit of wisdom from Buddha? Don’t waste time, as you never really know how much more time you will actually have. Keep this reality in mind each day, as it will help you maximize every precious moment.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.
In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about 2014’s most surprising developments. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
All the best,
Doug Fabian
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