How Exchange-Traded Funds Can Save You Money

If you're trying to buy an index of stocks, you pay a commission on each transaction. ETFs pre-package the equities for you in one tidy bundle-all in one trade, at one price, for one commission.

And remember, ETFs also charge less in management fees than mutual funds.

You can use an ETF either to get exposure to a market or industry, or hedge your risk against too much exposure.

For instance, you might feel you have too much exposure to Europe and Japan and not enough to China and Brazil. You could hedge against that risk with the Vanguard MSCI Emerging Markets ETF (NYSE: VWO).

Your investment horizon is also an important consideration. You can buy leveraged ETFs to protect against short-term downturns, or you can hold standard ETFs for long-term gains.

Top-Ranked ETFs

After you've decided which market you want to buy (or sell) you should lean towards the lowest cost ETFs in that category, according to Forbes.

"Let's assume you have picked the category you want exposure to...Then three things matter: costs, costs and costs," columnist William Baldwin recently wrote referring to ETFs.

Forbes ranked the four best buys in each of 11 categories, assuming a three-year holding period.

A few of the top-ranked ETFs with broad exposure to markets include: Vanguard Total Stock Market ETF (NYSEArca: VTI), the iShares Gold Trust (NYSEArca: IAU), the PIMCO 1-3 Year US Treasury Index Fund (NYSEArca: TUZ), and the Vanguard FTSE All-World ex-US ETF (NYSE: VEU).

These are just a few of the hundreds of ETFs that can reduce your trading costs and improve the performance of your investment portfolio.

Don Miller is a contributing writer with Money Morning.

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