Why Buy ETFs?

DailyWorth

What is an ETF?

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Question: What trades like a stock, but includes shares of several different companies?

If you said an ETF, you’re right. That’s the appeal of an exchange-traded fund. With one trade, you can buy, or sell, a basket of stocks (or bonds, or other assets).  So you’ve heard that the banking sector is hot, but you’re nervous about putting all your money into one bank’s stock? You can buy an ETF with shares in literally dozens of different banks or financial firms. You’ve seen housing prices climb and want to put some money into real estate, but don’t want to actually buy property? There’s an ETF for that too. You can buy one with shares of several different real estate companies, or homebuilders, or even home furnishings and improvements companies.  

ETFs have actually been around for two decades now. But the number of funds has exploded in the last few years, in part because the SEC relaxed the requirements around them. Until 2008, ETFs had to track a specific index, like the S&P 500. Now there are ETFs in dozens of categories--from consumer goods to clean energy to community banks--and even several bond ETFs. In fact, the number of ETFs available has increased a whopping 10-fold over the last 10 years--from 199 funds in 2003 to 1,194 in 2012.

Not sure where to start? A good strategy is to combine funds from different sectors to create diversification in your portfolio. We’ve pulled together examples of funds in some of the most popular categories, with details on performance history and cost. 

Click on the next slide for more.

 

Alternative Energy

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While alternative energy ETFs have experienced extreme growing pains in recent years, they have turned it around and surged this year. Most experts see this trend continuing; however, alternative energy has been a very volatile sector, so invest with extreme caution, especially if you choose a niche fund like one that focuses on solar or wind energy.

iShares S&P Global Clean Energy Index Fund (ICLN) - measures the performance of 38 global companies that represent the listed clean energy universe. Top holdings are wind, solar and electric companies, with the largest concentration of international exposure in Japan. 

  • 52-Week Price Range: $6.13-$9.90
  • Annual Expense Ratio: 0.48%
  • Year-To-Date Return: 25.00%
  • 1-Year Return: 28.21%
  • 5-Year Return: -26.88%

First Trust NASDAQ Clean Edge US Liquid Series Index Fund (QCLN) - Tracks the performance of 37 clean energy companies publicly traded in the U.S. and engaged in solar photovoltaics, biofuels and advanced battery technology, among other areas.

  • 52-Week Price Range: $14.70-$14.89
  • Annual Expense Ratio: 0.60%
  • Year-To-Date Return: 58.94%
  • 1-Year Return: 61.80%
  • 5-Year Return: -8.29%

Guggenheim Solar (TAN) - tracks 28 global, primarily small-cap companies involved in the solar energy industry. High return AND risk potential!

  • 52-Week Price Range: $12.60-$27.87
  • Annual Expense Ratio: 0.70%
  • Year-To-Date Return: 59.53%
  • 1-Year Return: 50.61%
  • 5-Year Return: -33.85%

 

Technology

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As the world gets smaller, tech companies’ profits keep getting bigger. While the sector’s performance this year has been dragged down by Apple’s disappointing output and global economic concerns, most experts agree that it is still poised to succeed moving forward. Some technology ETFs focus on a particular niche, like semiconductors or social media, and are more risky because of their lack of diversification.

Vanguard Information Technology ETF (VGT) - offers low-cost exposure to a very high-quality portfolio of over 400 companies involved in a wide variety of technology services with strong financials and likelihood of continued growth. Top ten holdings include Apple, IBM, Microsoft and Google. 

  • 52-Week Price Range: $64.81-$77.44
  • Annual Expense Ratio: 0.14%
  • Year-To-Date Return: 9.85%
  • 1-Year Return: 12.70%
  • 5-Year Return: 9.09%

Guggenheim S&P 500 Equal Weight Technology ETF (RYT) - offers a version of the S&P 500 Information Technology Index that is a combination of 71 companies in an equally-weighted variety of technology services including internet and computer equipment, semiconductors, and telecommunication services. Top ten holdings include Adobe, Intuit, Electronic Arts and SanDisk.

  • 52-Week Price Range: $48.95-$66.32
  • Annual Expense Ratio: 0.50%
  • Year-To-Date Return: 19.31%
  • 1-Year Return: 30.20%
  • 5-Year Return: 9.15%

PowerShares NASDAQ Internet Portfolio (PNQI) - tracks the performance of the 83 largest U.S.  companies engaged in internet-related businesses and listed on one of the major U.S. stock exchanges. Top ten holdings include Amazon, Priceline, Facebook and Google.

  • 52-Week Price Range: $36.57-$50.98
  • Annual Expense Ratio: 0.60%
  • Year-To-Date Return: 22.60%
  • 1-Year Return: 32.99%
  • 5-Year Return: 17.58% 
Retail

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The good news for retail investors is that the improving economy equates to more shopping and in turn, sector growth. The retail sector can include companies focused on products that we always need (a.k.a “consumer staples”), which tend to remain stable when the economy is bad, or stuff we want to buy (a.k.a. “consumer discretionary”), which tend to have cyclical performance.   

SPDR S&P Retail ETF (XRT) - offers exposure to 97 U.S. companies involved in a variety of retail categories, including big-box general merchandise stores, drugstores, grocers, department stores, automotive retailers, apparel stores, and specialty retail. Top ten holdings include Groupon, Ulta, Expedia and Dollar Tree. 

  • 52-Week Price Range: $57.22-$80.48
  • Annual Expense Ratio: 0.35%
  • Year-To-Date Return: 29.11%
  • 1-Year Return: 36.54%
  • 5-Year Return: 24.55%

Market Vectors Retail ETF (RTH) - intended to track the overall performance of 25 of the largest U.S. listed, publicly-traded retail companies. Top ten holdings include Wal-Mart, Home Depot, Walgreen and Costco.

  • 52-Week Price Range: $41.54-$54.29
  • Annual Expense Ratio: 0.35%
  • Year-To-Date Return: 23.27%
  • 1-Year Return: 29.77%
  • 5-Year Return: N/A

PowerShares Dynamic Retail ETF (PMR) - includes exposure to 31 companies involved in everything from online merchandising to rental services and traditional department store retail. Top ten holdings include Gap, Macy’s, Whole Foods and Restoration Hardware. 

  • 52-Week Price Range: $23.78-$31.95
  • Annual Expense Ratio: 0.63%
  • Year-To-Date Return: 27.16%
  • 1-Year Return: 32.18%
  • 5-Year Return: 18.11%
Health Care

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Obamacare or couldn’t care less, the biotech industry in particular is booming. Traditionally, investing in health care has been a defensive strategy that usually pays off regardless of the economic climate. However, investors need to be aware that the looming health care reform could negatively impact the sector in the future. 

Vanguard Health Care ETF (VHT) - offers low-cost exposure to a high-quality portfolio of nearly 300 large, medium, and small U.S. health care companies, ranging from pharmaceuticals to medical devices. Top ten holdings include Johnson & Johnson, Pfizer, Merck and UnitedHealth Group.

  • 52-Week Price Range: $67.40-$90.54
  • Annual Expense Ratio: 0.14%
  • Year-To-Date Return: 23.23%
  • 1-Year Return: 31.10%
  • 5-Year Return: 12.29%

SPDR S&P Pharmaceuticals ETF (XPH) - offers low-cost exposure to 31 U.S. pharmaceutical-focused companies. Top ten holdings include Johnson & Johnson, Forest Laboratories and Salix Pharmaceuticals. 

  • 52-Week Price Range: $53.20-73.16
  • Annual Expense Ratio: 0.14%
  • Year-To-Date Return: 30.77%
  • 1-Year Return: 24.28%
  • 5-Year Return: 19.53%

Market Vectors Biotech ETF (BBH) - tracks the overall performance of 25 of the largest U.S. listed, publicly-traded biotech companies. Top ten holdings include Gilead, Amgen, Biogen and Celgene. 

  • 52-Week Price Range: $72.25-$73.11
  • Annual Expense Ratio: 0.35%
  • Year-To-Date Return: 35.53%
  • 1-Year Return: 52.16%
  • 5-Year Return: N/A
Financials

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You might love to hate Wall Street, but it has rebounded from the 2008 crash with a vengeance.  The financials sector was a top performer in the past year and many experts expect that trend to continue as the economy improves further. So you might want to hate to love it instead.

SPDR Financial Select Sector ETF (XLF) - offers low-cost exposure to 82 companies involved in a wide variety of financial services, including insurance, commercial banking, real estate investment, mortgage financing, and real estate management and development. Top ten holdings include Berkshire Hathaway, Wells Fargo, Bank of America and MetLife. 

  • 52-Week Price Range: $14.09-$20.35
  • Annual Expense Ratio: 0.18%
  • Year-To-Date Return: 22.71%
  • 1-Year Return: 40.46%
  • 5-Year Return: 1.46%

PowerShares KBW Regional Banking Portfolio (KBWR) - seeks to reflect the performance of 53 publicly-traded, mid-cap, regionally-diversified companies that do business as banks or thrifts and are listed on U.S. stock markets. If you like the idea of supporting community banks over national big banks, this could be a good choice at a great price. 

  • 52-Week Price Range: $25.69-$40.51
  • Annual Expense Ratio: 0.11%
  • Year-To-Date Return: 28.63%
  • 1-Year Return: 29.68%
  • 5-Year Return: N/A

iShares Dow Jones US Broker-Dealer Index (IAI) - measures the performance of 22 investment services companies. Top ten holdings include Goldman Sachs, Schwab, Morgan Stanley and TD Ameritrade.

  • 52-Week Price Range: $19.75-$31.99
  • Annual Expense Ratio: 0.47%
  • Year-To-Date Return: 35.74%
  • 1-Year Return: 55.36%
  • 5-Year Return: 2.40%
Real Estate

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The housing market continues to improve, slowly. If you are like many people who would like to take advantage of the market upswing, but don’t have boatloads of cash to buy individual properties, real estate investment trusts (REITs) may be a good choice. REITs manage and collect rent from a wide range of property types, from commercial malls and corporate centers to hotels and apartments. REITs offer investors the ability to invest in real estate without the downsides of illiquidity and large minimum investments. They also offer attractive regular income, especially when interest rates are low.  

Schwab US REIT ETF (SCHH) - offers low-cost exposure to 86 income-generating U.S. real estate investment trusts (REITs).

  • 52-Week Price Range: $28.69-$36.44
  • Annual Expense Ratio: 0.10%
  • Year-To-Date Return: 7.55%
  • 1-Year Return: 7.95%
  • 5-Year Return: N/A

SPDR Dow Jones Global Real Estate ETF (RWO) - offers exposure to over 200 real estate companies (over 80 percent of the them are REITs) around the world. Over 50 percent are U.S. companies with the next largest concentration in Europe followed by Japan. This is the only ETF to offer global real estate exposure in one package, and international real estate, in particular, can offer attractive income in today's low-rate environment. 

  • 52-Week Price Range: $39.26-$48.17
  • Annual Expense Ratio: 0.50%
  • Year-To-Date Return: 3.59%
  • 1-Year Return: 12.00%
  • 5-Year Return: 4.48%

SPDR S&P Homebuilders ETF (XHB) - offers exposure to 36 companies involved in homebuilding as well as building product manufacturing, home furnishing and improvement retail and household appliance production. This year’s positive home sales data have indicated mostly positive trends for homebuilders. Keep in mind though that the housing sector is highly cyclical and sensitive to economic conditions. Top ten holdings include Home Depot, Williams-Sonoma, Bed Bath & Beyond and Toll Brothers. 

  • 52-Week Price Range: $20.57-$32.69
  • Annual Expense Ratio: 0.35%
  • Year-To-Date Return: 13.20%
  • 1-Year Return: 42.97%
  • 5-Year Return: 16.00%
A Few Other Funds You Might Fancy...

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PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) - This ETF is all about R&R, with a range of restaurant, entertainment and hotel holdings. Please note that companies involved in gambling are included. Out of 31 holdings, the top ten include Starbucks, Walt Disney, Starwood Hotels & Resorts Worldwide, and Sonic. 

  • 52-Week Price Range: $20.75-$29.87
  • Annual Expense Ratio: 0.63%
  • Year-To-Date Return: 28.59%
  • 1-Year Return: 37.17%
  • 5-Year Return: 19.75%

Global X Social Media Index ETF (SOCL) - If you’re addicted to your smartphone, iPod, tablet and laptop as much as we are, you’ll probably like this ETF. Out of 29 holdings, the top ten include LinkedIn, Facebook, Pandora and Google. Be aware that this index is in its infancy so future performance is highly questionable.

  • 52-Week Price Range: $11.81-$15.44
  • Annual Expense Ratio: 0.65%
  • Year-To-Date Return: 17.16%
  • 1-Year Return: 14.28%
  • 5-Year Return: N/A

SPDR S&P Transportation ETF (XTN) - If you’re a jetsetter, road warrior or frequent package receiver or sender, you might like this ETF. Out of 43 holdings, the top ten include, Hertz, UPS, FedEx and Delta Air Lines. 

  • 52-Week Price Range: $44.19-$69.92
  • Annual Expense Ratio: 0.35%
  • Year-To-Date Return: 28.02%
  • 1-Year Return: 38.34%
  • 5-Year Return: N/A

Some things to keep in mind: ETFs have to be traded through a brokerage account, so your trading costs can add up if you trade frequently, especially if you’re not trading through a discount brokerage. And while some ETFs track a broad index and include hundreds of stocks, others we included are more narrowly-focused and include a much smaller portfolio of companies, so they can be more risky. So make sure you protect yourself with a mix of investments across a variety of sectors.

You might also like:
Mutual Funds vs. ETFs
Invest In Your Ideals--And Earn Money Back
Are You Investing As Much As You Should?

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