Why ETFs Are Like Watermelons

watermelonSo you know how to invest in stocks, and are dead set on limiting your portfolio to only stocks, right? That’s like going to a farmer’s market and only buying apples.  Exchange Traded Funds (or ETFs) are another type of investment that you might consider adding to your basket.

So what is an ETF, anyway? Think of it as a watermelon. ETFs track an index (Dow Jones, S&P, Nasdaq) or a commodity, like steel or gold, but trades like a stock. It gives you exposure to the S&P 500 (the watermelon seeds, right?), and provides diversification, but offers more tax efficiency (low capital gains), and has lower management fees when compared to a mutual fund. ETFs have only been around since the late 1990s, but they have grown in popularity in recent years.

There are over 1,000 ETFs available in the US. Charles Schwab has the largest number of ETFs available, but you can certainly find an ETF investment that is right for you from any major brokerage firm. Should you invest in more than one ETF? Maybe get your feet wet with one, and then consider your options. This recent Morningstar article says that you should focus on cost and allocation when considering more than one.

So how do you feel about Apples, now?




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