How to choose an ETF and what are my options?

 How to choose an ETF and what are my options?

This is the second part in the ETF series. Learn here why I think ETFs are probably for you.

It can be overwhelming to look through the hundreds of ETFs offered in the market today. That's why I have compiled a list of categories of ETFs to help break them down into digestible areas.


Index
Funds that track a specific index
Examples: S&P 500 (SPY), Russell 2000 (IWM), Dow Jones Industrial Average (DIA)


Sector focused
Funds that track a specific industry or sector
Examples: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Healthcare (XLV), Industrials (XLI), Materials, (XLB), Real Estate (XLRE), Technology (XLK), Utilities (XLU)


Factor focused
Funds that target a specific characteristic in the market
Examples: Momentum (MTUM), Volatility (VXX), Size (SIZE), Quality (QUAL)

Factor investing has increased in popularity dramatically over the last few years. Institutional investors have used factor investing for a while, but this is generally a more advanced strategy that I would not recommend to the average passive investor.


Thematic
Funds that target a specific theme across different sectors and factors
Examples: Big Data (BIGD), E-Commerce (IBUY), Health & Wellness (BFIT), Millennials (MILN)

Thematic funds are a fun way to invest, especially beginners. If you're like me (and you've watched Terminator a few too many times), you might pick a Robotics-themed fund like ROBO or BOTZ.


Geographic
You can find ETFs that track just about any country, but the most common are regional:
USA, Europe, Asia, Emerging Markets
Examples: USA (SPY), Europe (IEUR), Asia Pacific (VPL), Emerging Markets (EEM), Total World (VT)


Growth
Funds that target companies that are expected to grow at a rate faster than average
Examples: IWF


Value
Funds that target companies that are potentially mis-priced or seen as undervalued
Examples: IWD


Size
Large-cap: Think of these as funds that are made up of the big large companies you've heard of (such as Apple, Exxon, or Johnson & Johnson)
Examples: SPY, VONV, NOBL

Small/Mid-cap: Think of these as funds made up of smaller companies that are not as well established as the Large-cap
Examples: IJR, IWO

Advantages & disadvantages of Large and Smid-cap:
Large cap funds tend to perform better in a low-performing or declining market. These companies are seen as "safer" investments, so investors tend to flock to safety during times of uncertainty.

Small cap funds tend to perform better in a high-performing market. Smaller companies can typically grow much faster than larger companies (because they have much more room to go), so when people have a lot of confidence in the market, they tend to flock to growth companies.


ETFs are a crucial part of a balanced portfolio. They are great tools to gain diversification and to reduce stock-specific risk. I personally like to use these funds as a way to get exposure to a certain area or sector that I favor in the near future. For example, I tend to trade into a Utilities ETF when I see skittishness in the broader market—such as when a certain leader of the free world makes playground-level threats to a certain unstable country.... For the beginners, put this knowledge to work by finding a sector you like in the long term.