Exchange-traded funds (ETFs) are a collection of assets such as stocks or commodities that track an index. In general, ETFs can be used as part of a broader investment portfolio.
Index funds allow users to pick and choose which countries they want exposure to within their investment portfolio with little effort required, saving them time and minimizing risk overall. The most common indices include: MSCI Emerging Markets Index MSCI Frontier 100 Index MSCI GCC Countries 10/40.
Many actively managed ETFs are based on indexes such as NASDAQ 100 and CAC 40.
You can follow the subsequent steps to help you select an ETF.
First, understand the weighting of your benchmark index. It includes its history and what countries are included, e.g., MSCI Frontier 100 Index. It will give you a better idea of what countries you’re exposed to and how your asset allocation is affected if some countries rise or fall in their weighting. For this step, it’s helpful to read the country-specific information available by BM.
Next, identify how broad or narrow customizing an ETF will be by comparing a few different indices that track a similar benchmark index.
For example, the Franklin FTSE Gulf States Index tracks the NASDAQ 100. It has 24% exposure to international large-cap companies and 75% exposure domestically. By comparison, iShares offers up 75% exposure internationally and only 25% domestically.
Once you’ve decided on a benchmark index, research and evaluate which ETFs are available in your market, there may only be one, or there may be dozens of them representing that same index. If you’re looking for broad exposure to international large-cap companies, like the NASDAQ 100, there’s probably more than one option available.
Depending on your goals, the size of your portfolio, and how much research you’re willing to do will determine which ETFs you ultimately choose. For example, if you want broad exposure to international large-cap companies but don’t know where to begin with picking the right one for you, it might be best to go with iShares Core MSCI Total International Stock Index Fund. If, instead, you are looking for broad domestic exposure and decide that T. Rowe Price U.S. Broad Market would work best for you, then go ahead and invest in it.
Many people trade ETFs because trading them is straightforward. However, you need to consider the total cost of investing, not just fees. You should make sure you account for transaction costs, bid-ask spreads, and other possible hidden costs associated with making a trade, such as commissions or brokerage fees.
ETFs are only as liquid as their underlying securities. Suppose you’re trying to invest in small companies that aren’t heavily traded yet (and maybe considered illiquid). In that case, it will probably be challenging to get into and out of ETFs that track those companies efficiently due to liquidity issues.
Additionally, because many ETFs track niche indices, those same securities may not be well-known or easy to find.
Lastly, it would be best to consider whether your target market accepts ETFs since they can’t trade them like stocks. Also, keep in mind the potential tax liabilities of trading an ETF as well as how much effort it will take for you to sell one if needed. You want to ensure that selling an ETF will be straightforward and free from issues like using a mutual fund instead.
ETFs allow you to buy and sell at any time. You can use them in special accounts such as Individual Retirement Accounts (IRA) and non-taxable accounts like health savings accounts (HAS). ETFs, come with low transaction costs, making them more cost-efficient than other options.
Investing in stock exchanges through ETFs gives you access to a broad range of markets and market segments worldwide. Since you can trade ETFs throughout the day, the most significant benefit is that your risk exposure may decrease while also allowing you to take advantage of potential equity spikes or dips.
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