I personally hold a number of ETFs as part of my core index portfolio in addition my dividend growth holdings. More and more investors are using ETFs to ensure they have adequate diversification. However, as ETFs become more popular the sheer number of available ETFs goes up every day. I think there is one very important step when examining ETFs, and it simply involves understanding what that ETF holds in its portfolio.
All an ETF really is is a portfolio of assets that you are buying into. That can be anything from a bond portfolio to a dividend growth portfolio. As an ETF investor, you are buying into a piece of those holdings along with thousands of other investors. The most important thing to understand about that ETF you decide to buy is what exactly is in that portfolio.
Luckily, this is very easy to figure out. All you need to do is visit the website of the ETF provider and click on a link that is called something like, "Top 10 Holdings". In that section you will see exactly what assets that ETF holds. For example, in an oil and gas focused ETF you will see a number of the largest oil and gas companies in the world such as ExxonMobil and BP. What I always look for is something that does not seem to fit. Financial managers can play tricks in ETFs to boost returns and can include assets that perform better than the underlying index the fund is supposed to track. If you see anything that does not make sense in that top 10 list, then you need to dig into the reason why. If you can't figure it out, I would suggest you move on to another ETF.
Just like investing in individual stocks, an investor should do some due diligence on the ETFs they place in their portfolio. As a do-it-yourself investor you cannot blindly go into an ETF thinking that because it is an ETF it is diversified and right for you. Be sure to understand exactly what that ETF holds and why. Doing this will protect you from buying a wayward ETF that does not achieve your desired objective.
This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.
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