Some investors do not mind the risks and fluctuating prices that characterize an exchange traded fund, also called an ETF. This security tracks a commodity, basket of assets, or an index, similar to an index mutual fund. However, it trades in a fashion similar to a stock, so a daily net asset value is not calculated each day as is done with a mutual fund.
The ETF arena has increased in recent years and there are currently close to 700 different investment options. There are ETFs based on commodities, bonds, futures, equity indexes, equity sub-indexes, and even investing style and market capitalization. The positive aspect of this is that it provides investors with a lot of choices. The negative side is that they are not all equal when it comes to quality and some may not have enough investor interest to stay afloat.
When selecting the best ETF from amongst the competition, several factors should be considered. The ETF should have a certain level of assets, preferably $10 million or more. Anything less and there will be limited investor interest, which results in poor liquidity and also wide spreads. The ETF should also have good daily trading volume because this speaks to its liquidity and spread.
Investors should think about the underlying asset class or index that serves as the basis for the ETF. If they are seeking to diversify their portfolio, individuals may want to invest in ETFs tracking a broad index that is widely followed. The closeness to which the ETF tracks the index should also be examined because a close-tracking ETF is preferable.
An ETF that is first within its market sector will usually become king by scooping up most of the assets. Therefore, investors should pass by the imitators that do not have any differentiation. The ETFs that stand out from the crowd are more likely to attract the assets of an investor.