ETF investing is so popular because of its ease and safety - but you might feel like the amount of choices in exchange-traded funds can be overwhelming.
But there's nothing to be overwhelmed about with ETFs. ETFs are like mutual funds that trade like stocks. Unlike mutual funds that are priced once per day after the markets close, ETFs can be traded on the major exchanges intra-day - or anytime during the trading day. The prices fluctuate just like stocks.
ETFs are also popular because of their low turnover, meaning they're not often replaced as fiscal assets during a set time period. And they're great when an investor is looking to diversify her portfolio. Plus, there are multiple ETFs to choose from on every major index.
Because there are so many ETFs on the market, selecting a specialization can seem difficult. But we've done the research for you.
7 Picks for Successful ETF Investing
ETF Investing Pick No. 1: First Trust IPOX-100 Index Fund (NYSE: FPX)
Money Morning's Defense and Tech Specialist Michael Robinson knows that investment bankers absolutely love to boast about successful initial public offerings (IPOs). He's also well aware that most IPO shares are divided into mutual funds, hedge funds, high-net-worth investors, and insurance companies, which makes it particularly difficult for the average investor to get a leg up in the IPO market.
Enter FPX.
This IPO ETF can be used to sidestep Wall Street completely. It offers a good combination of tech stocks, as well as a decent entry into the broader market. "That makes it a great 'twofer' in which 40% of the top 20 holdings relate to tech or the life sciences," says Robinson. This ETF consists of 100 diverse stocks, with access to various sectors, including financial, metals, heavy industry, energy, auto, and retail. Now trading at just under $54, FPX is priced cheaper than many of its portfolio holdings, including Facebook Inc. (Nasdaq: FB) and Alibaba Group Holding Ltd (NYSE: BABA), which is what makes it the most cost-effective way for the average investors to cash in on the IPO boom.
Money Morning Members: Continue reading for six more ETF investing picks...
ETF Investing Pick No. 2: Renaissance IPO ETF (NYSE ARCA: IPO)
This ETF was launched in October 2013 in response to investors' demand for a safer, cheaper method to participate in IPOs. It was designed by an IPO research team to give investors exposure to the latest IPOs on the market. One-third of the fund's holdings consist of tech stocks. The other industries included are healthcare, real estate, and energy. According to etfrends.com, on Monday, March 4, 37 members of the Bloomberg IPO Index reported year-to-date losses of 10% or more. Renaissance ETF, however, was up nearly 6%. And since this time last year, IPO's earnings gained 8%.
ETF Investing Pick No. 3: First Trust North American Energy Infrastructure Fund (NYSE Arca: EMLP)
EMLP focuses on master limited partnerships (MLPs). MLPs are limited partnerships required to obtain 90% of their cash flow from real estate, commodities, or natural resources.
Energy MLPs are midstream companies. They transport, store, and process oil and gas rather than own it. So they stay profitable as long as there is a commodity to move. This is what makes them market-proof. The EMLP ETF holds 68 diverse stocks from the oil and energy sector. This past January, it became the first ETF to accrue over $1 billion in assets.
Ultimately, this ETF gives investors the opportunity to profit from an otherwise difficult situation - they will benefit from changes brought on by low oil prices. EMLP is up 11% over the past year.
ETF Investing Pick No. 4: First Trust NYSE Arca Biotechnology Index Fund (NYSE Arca: FBT)
This popular biotech ETF has risen a staggering 34% in the past year, and 14% so far in 2015. FBT is a broad exchange-traded fund of 31 companies. Its holdings include smaller companies like the red-hot Novavax Inc. (Nasdaq: NVAX), up 32% on the year, but it also tracks biotech as a whole. And that particular industry is already experiencing a stellar 2015.
Along with having NVAX on its roster, FBT holds Lannett Co. Inc. (NYSE: LCI), a generic drug vendor up 60.7%., as well as Biogen - which experienced an 8% surge in value in the course of one day: Friday, March 20. As Money Morning Associate Editor Jim Bach told readers recently, "FBT is not just a collection of smaller firms getting a boost from various regulatory catalysts. Its firms of all shapes and sizes are appealing to the investing public for what the sector brings to the market."
ETF Investing Pick No. 5: Vanguard REIT ETF (NYSE Arca: VNQ)
Real estate investment trusts (REITs) are controlling the dividend market. In order to play this trend, an investor's best bet would be to snatch up shares of VNQ's ETF. While interest rates remain low, REITs continue to outperform.
And there's more to the REIT industry than dividends.
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"The industry's total market cap was $907.4 billion in 2014," Money Morning Associate Editor Alex McGuire wrote last week. "That marks a staggering 235% increase since 2009. At this rate, it is well on its way to becoming a $1 trillion industry within the next few years." VNQ is currently up 19% in the past year, with an impressive yield of $3.38.
ETF Investing Pick No. 6: PowerShares S&P SmallCap Health Care ETF (Nasdaq: PSCH)
PSCH offers exposure to high-profit small cap stocks without the risk of picking just one tech startup. Because, right now, small-cap stocks are beating the broader market by a large margin.
The Russell 2000 Index, which consists mainly of smaller companies, has surged 20% in the last five months. During that same span of time, the Dow has gained merely 9.5% and the S&P 10.5%. Unfortunately, many investors have missed out on these gains because of the belief that small-cap stocks are far too volatile. But the beauty of this ETF is that it's tapped into the strongest, most solid sectors.
Money Morning's Small-Cap Investing Specialist Sid Riggs says, "It's important to make sure you're investing with global must-have trends that provide strong tail wind. My favorite sectors right now are biotech, cybersecurity, all-flash memory storage, artificial intelligence, and Chinese consumers - all of which either meet a critical demand for the future or are the future."
PSCH has 71 stock holdings, all of which are U.S. companies. Over 95% of the fund's holdings are invested in either small-cap or micro-cap firms. Its share price is up 13% from the beginning of the year. Conversely, the Dow is up just 1.5%.
ETF Investing Pick No. 7: Fidelity Nasdaq Composite Index Tracking Stock (Nasdaq: ONEQ)
This ETF mirrors the holdings on the tech-focused Nasdaq Composite Index. It's a prime way to get stakes in the big-cap tech stocks like Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT), Intel Corp. (Nasdaq: INTC), and Amazon.com Inc. (Nasdaq: AMZN).
Money Morning's Executive Editor Bill Patalon says, "Though ONEQ - by definition - is focused on technology, the fund also provides some nice diversification. The ETF holds about 1,940 stocks, 46% of which are tech related. Consumer cyclicals, financial services, and industrials make up another 25% of ONEQ's holdings."
Since March 25, 2014, ONEQ has surged 14% in share price - 4% since the beginning of 2015. Currently, its share price is $192.68.
Everybody Stay Calm: Recently, the Nasdaq eclipsed the 5,000 level for the first time in 15 years. The pundits are convinced this is a bubble. But we firmly believe the gloom-and-doomers are wrong. In fact, we think the tech sector will beat the broader market by a long shot. Here's what the numbers are actually saying and how you'll profit from them...