ETFs are a great way to go for anyone looking to plug holes in their portfolio. If you’re looking for more exposure to foreign markets or can’t decide which biotech stock to invest in, maybe an ETF is the way to go. A lot of experts are pointing to ETFs as a good way for investors to get back some of their lost gains.
Here are a few differences between an ETF and an index fund.
Taxes: The big buzz about ETFs is their tax efficiency. The big “tax event” for ETF shareholders happens when you sell your shares, hopefully at a profit, after which you’ll pay capital gains taxes.
Expense ratios: By construction, ETF investors have less exposure to capital gains taxes than mutual fund shareholders. That’s because fund managers frequently buy and sell the fund’s holdings — and ask investors to pick up the tab. ETFs occasionally shift shares, too, although much less than most mutual funds. Annual expenses for ETFs range between 0.1% and 0.65% and are deducted from dividends. Index mutual funds charge anywhere from 0.1% to more than 3%.
Minimum investment requirement: For investors with limited funds (say, less than $1,000) who want to get started in the stock market, ETFs offer a cheap entrée. Through your discount brokerage account, you can buy one single measly share if you choose. In comparison, many index mutual funds have high initial balance requirements. (Those with lower requirements often charge higher fees.)
Ease of use: Here’s the double-edged sword of ETF investing. They are easy to buy — you simply need a discount brokerage account (and that’s easy to get — and cheap). Consequently, they’re easy to trade. And trade and trade and trade.
Here are a few ETFs we think are worth keeping an eye on:
1. Vanguard Small Cap Growth ETF (VBK): Although the year-to-date returns were -40%, we think small-caps may lead the charge of the next bull market. Roughly 19% of this ETF’s holdings are in healthcare and industrial materials–both reasonably stable sectors. Holdings include: Devry, Inc. (NYSE: DV), Edwards Lifesciences (NYSE: EW) and ANSYS, Inc. (Nasdaq: ANSS).
2. SPDR S&P Dividend (SDY): Dividend ETFs seem to be gaining a lot of interest lately. This investment seeks to replicate, before expenses, correspond generally to the price and yield of the S&P High Yield Dividend Aristocrats index. The fund uses a passive management strategy designed to track the price and yield performance of the Dividend index. It is nondiversified.SDY has been down almost 23% over the last 12 months. However, its holdings, which include Con Edison (NYSE: ED), FirstMerit Corp. (Nasdaq: FMER) and Vectren Corp. (NYSE: VVC), all of which we think are in sweet spots of the market.
3. WisdomTree LargeCap Dividend (DLN): Another dividend ETF. DLN’s holdings include Chevron Corp. (NYSE: CVX), Pfizer, Inc. (NYSE: PFE), and Wal Mart Stores (NYSE: WMT). he fund employs a passive management (or indexing) investment approach designed to track the performance of the WisdomTree LargeCap Dividend index. It attempts to invest all, or substantially all, of assets in the stocks that make up the Index. DLN generally uses a replication strategy to achieve its investment objective and generally will hold each stock in approximately the same proportion as its weighting in the index. It is nondiversified.
4. Market Vectors Intermediate Municipal (ITM): The fund invests at least 80% of total assets in fixed-income securities that comprise the index. It has adopted a fundamental investment policy to invest at least 80% of assets in investments suggested by its name.
Here’s a cool video on ETF investing: