Choosing an Exchange Traded Fund

There is a large variety of Exchange Traded Funds (ETFs), many of them very similar to mutual funds. If you’re going to initially buy just one fund, you need to be very clear about your goals. ETFs, just like ordinary stocks, run the gamut from very high risk with possibly high returns or high losses, to relatively low-risk with more stable but lower returns.

If you’re looking for a secure, low-risk and steady return, you will need to look at either index ETFs or sector ETFs. Index ETFs, like mutual index funds, follow a particular index. That might be a stock index like the S&P 500 or the NASDAQ. These have low volatility, as there is not a lot of buying and selling. The makeup of the index remains fairly stable.

With the financials in trouble right now and the stock market itself on shaky ground, you might want to stay away from these otherwise popular ETFs. When the stock market is going down, these ETFs go down with it.

It might be better, in troubled financial times, to look for ETFs that follow a sector that is doing well right now. There are sectors that do well precisely because the economy is in trouble. These could be called anti-stock market plays.

Some of these are similar to stock market index ETFs. They simply follow a different sector. One sector that is likely to do well over the next two to five years or more is the energy sector. A good energy sector ETF will include not just the traditional energy stocks of oil and gas producers. They will also include emerging technologies such as wind, sun, geothermal, and alternate fuels.

While oil and other energy markets may go up and down over the months, the overall movement is up. Even though gas is going down right now, we still need energy and so does the rest of the world. That’s why it’s a good idea to get a well-diversified energy ETF.

The other sector, which includes energy, is the greater commodities market. Commodities will also go through corrections but they are still in a bull market. Once again, people still need food. They still need metals and wood for building. If the U.S. ever gets around to addressing its serious infrastructure problems, there will be a big call for raw materials.

And regardless of what the U.S. does, India, China, and the Arab Emirates are not going to be slowing down on their building or their eating any time soon. Commodities are a safe bet for the near and far future. Some are calling the commodities bull a “bubble.” This is unlikely simply given the supply and demand picture.

Within the commodities sector you will also find the precious metals, gold, silver, platinum, and palladium. These metals are also undergoing a stiff correction right now but the fundamentals have not changed. A precious metals ETF might be a very good bet right now. You can buy an index of the precious metals. You can also buy and index of precious metals miners. These go from high-risk junior miners to the big boys.

When you buy precious metals you are automatically buying some important base metals, like lead, zinc, copper, and others. These base metals are often found along with gold and silver. Some ETFs will focus more on these industrial metals and less on the precious metals.

As you move away from the indexes and the sector ETFs, you get down to very narrow ETFs. To stick with the precious metals for the moment, you can buy gold and silver ETFs that try to imitate the spot price of these metals. This is higher risk but with the potential for a higher return.

Really think about your goals for this investment and then look at the sector that appears to be on the way up. Some are saying that financials are cheap right now. They certainly are cheap right now. The problem is that they could get a lot cheaper over time. The end of the housing and financials bust is far from over. Tread carefully in this area or in any area that is related to housing and loans.