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How do I Choose the Best ETF Portfolios?

By Dana DeCecco
Updated Jan 23, 2024
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Exchange Traded Fund (ETF) investing can lead to some interesting portfolio configurations. The best ETF portfolios are typically diversified with the emphasis placed on the objective of the investment. Current income, capital growth, and risk mitigation are types of investment objectives that are addressed when building ETF portfolios. Combining ETF investments can produce unique and tailored investment portfolios.

Many ETFs are composed of a portfolio of financial assets. The configuration of the ETF portfolios will determine the performance under different market conditions. An ETF designed for current income will be composed of investments in dividend paying stocks. These stocks can be purchased by the ETF on the basis of highest dividend yields or strongest history of dividend growth. Market capitalization and liquidity may also be factors in the selection of securities.

The investor seeking capital appreciation may be interested in an ETF focused on growth stocks. Growth companies invest profits back into the company rather than paying dividends to stock holders. The investor could realize a capital gain through the increased share value. Many different methods are used to evaluate growth stocks, including fundamental and technical analysis techniques.

Risk mitigation techniques are designed into some ETFs. Portfolio diversification by investing in unrelated financial assets attempts to control volatility while providing a steady rate of return. These ETFs may consist of stocks, bonds, commodities, or currencies, and are a combination of many different kinds of assets. Many of these ETF portfolios are actively managed.

Highly leveraged ETFs are designed for short term speculation in market price movements. Leveraged ETFs typically track major indexes and can be long or short positions. Returns can be two or three times the normal payout, but the potential losses are also magnified at these same levels. Since ETFs are traded like individual stocks, the short term trader can use leveraged ETFs for swing trading index price fluctuations.

Many investors follow specific types of companies, products, and services. The best ETF portfolios for this kind of investor are industry and sector ETFs. These ETFs own a portfolio of stocks within a particular industry, providing a more diversified approach to sector investing. The risk of one company failing is mitigated by the investment in a basket of similar companies.

Major market ETFs are available for domestic and international indexes. The major indexes track large stock market segments, which generally represent the general economic conditions in different countries. ETF portfolios combining indexes from various countries may be the best choice for the diversified investor. Foreign currency ETFs are also available individually as a basket of currencies.

Commodity ETFs provide financial security that is not correlated with the stock market. Non-correlated assets should be a portion of the diversified portfolio. During times of stock market decline, the commodity sector typically advances. Recent studies indicate that a portfolio consisting of diversified investments in stocks, bonds, and commodities provide steady returns without excessive volatility swings.

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