This is a good time to think about investing in exchange-traded funds. ETFs have been a popular choice for investors seeking a relatively low-cost way to diversify across asset classes, and most major discount brokers now give investors the ability to buy ETFs commission free.
For investors who are managing taxable accounts, ETFs can also be a smart choice in the last few months of the year when many mutual funds make taxable distributions of capital gains and income to shareholders. Most ETFs don’t pay out capital gains, and they typically distribute income quarterly.
Given the explosive growth of ETFs in recent years, the question is, which ETFs should you own now? Some ETFs are bringing in strong returns while others haven’t kept up this year, so start with funds that are in favor now. Lately that’s been ETFs that invest in U.S. stocks, specifically U.S. large-cap stocks, dividend-paying stocks, and low-volatility stocks. Foreign and smaller-cap stocks just haven’t kept pace.
Then, focus on finding ETFs that trade well. A thinly traded ETF often has wide spreads between the bid price (the price someone is willing to buy the ETF) and the ask price (the price someone is willing to sell it), and the spread can add up to far more than a trading commission.