You want to invest, and you have heard about ETFs, but you are overwhelmed by the choices. Which one should I buy? What are the benefits? What are the risks?
To begin, “ETF” is the abbreviation for “Exchange Traded Fund.” You can learn more about ETF’s at Investopedia. Here is a link: https://www.investopedia.com/terms/e/etf.asp
Here is my short list of things to consider when you buy an ETF:
- Does the ETF pay at least a 1.0% dividend? A yield of more than 2.0% is my preference.
- What is the expense ratio? I prefer ETF’s with an expense ratio of less than 0.10%, but I do own some with expense ratios up to 0.50% if the yield is good. For example, PFF has a yield of 5.60% and an expense ratio of 0.46%.
- What are the total assets? For example, real estate ETF REM (iShares Mortgage Real Estate Capped ETF) has total assets of 1.14B. That is over one billion in assets. For most ETF’s, but not all, I prefer the assets to be at least a billion. There is some safety in size.
- What is the trading volume? If the shares are not actively traded (about 100,000 share per day minimum) then there may not be a lot of interest in the ETF and you might not be able to sell as quickly as you might like. PFF’s current Average Volume (10-Day) is 2,111,249. I could sell quickly, if this wasn’t a holding I wanted to keep.
- What are the contents? This might be the most important question. There are two parts to this. The first is “how many individual stocks or investments are inside of this ETF?” In the case of REM, the answer is “35.” If you buy one ETF, in this case REM, you get investments in thirty-five companies. That makes more sense than buying 35 different stocks. The second part is “what is the quality of the companies?” This is harder for most to determine, but a quick look at the top five will give you a sense. For example, if you are considering ETF VYM, (Vanguard High Dividend Yield Index Fund), you will see that the top five investments are JP Morgan Chase and Co, Exxon Mobil, Johnson & Johnson, Wells Fargo and Chevron.
You should also ask “are there other similar ETF’s?” that can do the same job with better answers to the five questions I suggest. REM for example, is like VNQ (Vanguard Real Estate Index Fund) but VNQ has some attributes that make it better than REM. Do you know what they are?
Here are some hints: Total assets, number of positions, dividend yield and the expense ratio are all quite different. I would buy VNQ before REM. Why? Think about it and send me your thoughts or comment on this post.