Picking individual stocks and timing your entry and exit in the current market can be a futile exercise. Even among professional money managers, 90% get it wrong!
Instead of trying to find the right stock, a better strategy could be to invest in ETFs.
An ETF, short for Exchange Traded Fund, is like an index fund (where you buy a group of stocks that are part of an index like the Dow Jones or S&P 500). They allow you to diversify your portfolio and take advantage of hot sectors without having to purchase a wide variety of investments.
Some brokerages have their own ETFs, and they won’t charge you a commission for trading those. Other brokerages, including TD Ameritrade, offer several commission-free ETFs as well, so if you’re interested in making ETFs a significant portion of your portfolio, the commission structure for trading this asset should be a consideration.
There are ETFs for almost any asset class imaginable. These 7 are the most common:
- Broad Market ETF – As the name suggests, a broad market ETF tracks indexes like the Dow Jones, S&P, and NASDAQ. Some track countries and regions.
This type of ETF is the most passive and diversified. They also tend to have the lowest fees. If you’re just starting out with ETFs, then a broad market ETF is a great place to start.
- Industry-specific ETF – This type of ETF tracks stocks in a particular sector, like technology, biotech, real estate, etc. If you are confident that an industry is “hot,” but you don’t want to put all your eggs in one basket, an industry-specific ETF can help you realize the upside while minimizing your risk.
- Dividend ETF – If the idea of steady passive income appeals to you, then a dividend ETF could be an attractive investment opportunity. Some investors are skeptical of dividend-specific stocks and ETFs because they argue that the dividend yield can result in a premium price that results in a zero-sum game. However, in today’s volatile market, the stability of this investment vehicle could a welcome change.
- Bond ETF – Bond ETFs give you the benefits of a secure investment but they’re more liquid. They also pay interest income monthly, so you don’t have to wait until maturity to get paid.
- Commodity ETF – Investing in commodities like gold, natural gas, and agriculture can be complicated, but buying commodity ETFs can give you access to this asset class in a straightforward, simplified way.
- Currency ETF – If you’re passionate about currency trading and international investments, then currency ETFs can help you hedge and diversify. However, these ETFs can have broad swings, especially if you invest in emerging markets.
- Real Estate ETF – These ETFs primarily focus on REITs (real estate investment trusts). In general, REITs are already diversified, but ETFs also give you the option to focus on a specific type of real estate.
The Bottom Line: ETFs are becoming increasingly popular. If you’re looking for an easy way to explore a new asset class, then planning a conservative entry into ETFs could be a smart move.
