Learn effective methods for selecting top ETFs with insights on cost factors, liquidity, and sector-specific options. This guide helps investors diversify efficiently while understanding risks, costs, and key features of ETFs, suitable for building a resilient investment portfolio.

Smart Approaches to Investing in the Best ETFs

The exchange-traded fund (ETF) landscape features over 2,000 options valued at more than $2.3 trillion. ETFs are categorized into 13 sectors based on cost structures, covering areas from stocks to niche fields like emerging markets and specialized industries worldwide. Known for their ease of use and passive management approach, ETFs tend to have lower costs compared to mutual funds. Their minimal trading activity helps keep tax liabilities low, making them attractive for taxable accounts.

Despite advantages, ETFs carry annual fees ranging from 0.01% to over 1%, which can influence overall trading expenses. Nonetheless, ETFs remain popular, with most of the $2.2 trillion invested in U.S. ETFs tracking indexes that automatically adjust holdings based on stock baskets. In 2017, top passive ETFs under $50 million in assets and with expense ratios below 0.4% were highlighted.

ETF Trading Tips

Important cost considerations include:

Expense ratios that reflect yearly fees charged by the fund.

Bid-ask spreads or trading costs incurred when buying or selling ETFs through brokers.

The benefit from securities lending, which can reduce overall costs—some micro-cap ETFs like iShares Micro-Cap and Schwab Small-Cap use this to offset expenses, sometimes achieving negative net costs.

Liquidity ratings determined by trading volume and bid-ask spreads; higher scores (up to 10) indicate more tradable and stable ETFs suitable for long-term investments.

Be mindful of less liquid or international ETFs, especially those investing in small-cap or illiquid assets. Avoid trading during strong market directions to prevent magnified risks.

Beware of: Leveraged ETFs that use derivatives and debt to amplify returns or inverses. These are risky over the long term and generally unsuitable for most investors.

Key Factors When Selecting ETFs

Focus on low-cost options, as small differences in annual fees significantly impact growth. Always review expense ratios; for example, the Vanguard S&P 500 ETF has an expense ratio of just 0.05%, resulting in a $5 cost per year on $10,000 invested. Verify fund performance on official sites to confirm it tracks its benchmark consistently.

Consider these popular ETFs across various sectors:

Vanguard Small-Cap ETF

iShares Core Russell US Growth ETF

Schwab US Large-Cap Value ETF

Vanguard Developed Markets ETF

Schwab Emerging Markets ETF

Vanguard High Dividend Yield ETF

Vanguard Long-Term Government Bond ETF

SPDR Intermediate Corporate Bond ETF

Sector-specific ETFs

Industry-Specific ETFs:

Healthcare: Invests in pharmaceuticals, biotech, medical equipment, and hospitals, driven by aging populations and advances in medicine.

Energy: Includes oil and gas companies, with prices affected by resource scarcity and demand levels.

Utilities: Covers providers of essential services like electricity, water, gas, and telecom—offering stability during economic downturns.

Consumer Staples: Focuses on daily necessities such as food, health products, utilities, alcohol, and tobacco—good for diversification. Expense ratios average around 0.14% or $14 annually per $10,000 invested.