There are thousands of ETFs available for sale. It is natural to feel swamped by all options available: countless indexes, various asset classes, multiple legal structures.
Unfortunately only a small subset of available ETFs are worth being in a regular investor’s portfolio. That means we, investors, need to be extra careful when choosing ETFs.
My recommended ETFs are meant to be used in a buy-and-hold (long term) investment strategy. This strategy aims to achieve the returns of the market (note: different from beating the market) through simple techniques that I can easily understand.
These ETFs have the characteristics of the Traditional Index Fund (TIF) as popularized by John Bogle:
- Broad based – tracks the performance of a whole market (e.g. US Stocks, global stocks). This brings diversification to a portfolio. The following funds are excluded due to this criteria: funds which focus on specific sectors (e.g. tech stocks); funds that track a small subset of the market; ETFs with custom investment strategies (e.g. leveraged ETFs, thematic ETFs).
- Passive – tracks securities that are part of an index. Passive strategies have been shown to outperform active strategies over the long run for most investors when fees and taxes are considered.
- Traditional asset classes – invests in asset classes which have real expected returns over fees and reduce portfolio risk: stocks, bonds or REITS.
- Low cost – has minimal expenses. Expenses affect returns. Niche ETFs often have high costs.
Having a general understanding of the ETFs worth buying will make it easier to select an ETF for your portfolio.