5 tips to choose the best ETF funds
ETF or Exchange-Traded Funds are a type of mutual funds that trade in stocks, securities and track various indexes. Exchange-traded funds often invest in a broad range of industry sectors and use various strategies to yield maximum returns. One of the biggest advantages of investing in high dividend ETFs is they have lesser fees than other indexed funds, thereby costing you less in taxes.
Although ETFs help in diversifying your portfolio, it is important to choose the right funds that compliment your current investments. Here is how you can choose the right high dividend ETF funds.
- Consider tracking difference
One of the factors that set high dividend ETF funds from other market investments is tracking differences; that is, the difference between ETF performance and index performance. The lower the tracking difference, the better the ETF fund. This ensures that the ETF fund is reasonably priced and trackable.
- Define your investment goals
Identify your investment objectives to pick the best ETFs. Ask yourself if you want to invest in companies with specific characteristics, diversify your portfolio, or find a lower-cost alternative to mutual funds. Furthermore, consider how long you plan to invest. Financial experts suggest not investing if you will need the money within the next five years. It is also not recommended to invest at the expense of other financial goals such as saving for retirement or paying off high-interest debt.
- Liquidity of ETF funds
This is one of the most important factors that can help in choosing the best high-dividend ETF funds. The liquidity of ETF funds depends on two factors: liquidity of the ETF and liquidity of its corresponding underlying shares. Market experts suggest that funds with higher trading volume and more underlying liquid assets tend to be less volatile, making them safe to invest.
- Level of transparency
While focussing on expense ratio is important, it is also important to be aware of the stock holding of your preferred high-dividend ETF funds. This helps you decide if it is wise to invest in that particular ETF fund in the long run. One of the biggest advantages of investing in ETF funds is that they maintain a level of transparency with respect to their holdings and underlying investments. So, research their holdings and evaluate if they are a perfect fit for your portfolio.
- Calculate risks
This is an important factor irrespective of the type of investments. Ensure that the risks associated with your high dividend ETF fund will let you sell easily and earn maximum profit. Being aware of its potential closing will also help you decide the right time to liquidate your funds. Closing can happen if a fund has not yielded enough assets to offer profitable returns, including administrative costs. It is necessary to review each fund’s assets, average daily trading volume, and trading tenure to evaluate the risks of investing in a particular high dividend ETF fund.