How to Get Started with ETFs
Include ETFs in Your Portfolio
As with any investment, it is important to understand the product you are using in your portfolio. So before you decide to include ETFs in your investment strategy, you should understand the basics about exchange-traded funds.
Know the Benefits and Risks of ETFs
Once you have an understanding about ETFs, you can learn how they work to your advantage. Understanding the benefits of ETFs will help you utilize the correct investment strategy when including exchange-traded funds in your portfolio.
It is equally important to understand the disadvantages of ETFs. Before you buy or sell any investment product you need to know all the limitations of the asset. You don't want to have any misconceptions about an investment’s performance and you need to understand all the risks involved.
Learn About the Different Types of ETFs
There is no shortage of selection when it comes to ETFs. There are multiple exchange-traded funds for indexes, sectors, styles, and regions. It can be a little overwhelming, but if you have a better understanding of the major types of ETFs, it will help you narrow down which kind of funds will fit your investing strategy. Major types of exchange-traded funds worth exploring include industry ETFs, foreign ETFs, commodity ETFs, and style ETFs.
Decide on the Best ETF Investing Strategy
Are you investing in ETFs to gain exposure to a market sector? Are you using ETFs as a hedge against foreign risk? Do you want to trade ETF derivatives against your positions? Before you add ETFs to your portfolio, you need to decide why you are investing in the funds. Only then can you decide which ETF trading strategy is the best fit for your portfolio.
Understand How ETFs Will Affect Your Tax Return
One of the major benefits of ETFs is the tax advantage it holds over other investment vehicles, especially mutual funds. Due to the nature of ETFs, capital gains taxes are not realized the same way they are with other investment products. However, that does not hold true in all countries, so it is important to be in sync with local tax laws.
Set up a Brokerage Account
If after due diligence and lots of research you feel you are ready to add ETFs to your investment portfolio, it’s as easy as calling your broker. Or opening an online brokerage account will work just as well. Be sure to fully research your options before opening a brokerage account.
No investment is perfect, but ETFs (and ETNs) make a pretty strong case to be considered for your portfolio and they do have their advantages, so don't overlook these assets as potential fits for your trading strategy.