Selecting the Best Technology ETF for Your Portfolio
On this episode of A Wiser Retirement Podcast, we talk about what an ETF is, how ETFs operate, and important things to know about ETF tradability. Casey Smith, Matthews Barnett, CFP®, ChFC®, CLU® and Brad Lyons, CFP® also walk through how to select the best technology ETF for your investment portfolio.
An ETF is fairly straight forward. The first ETF was SPY back in 1993. ETFs have only really been used since the 2000s, making them a lot newer than mutual funds. An ETF is a basket of securities, that trades on the exchange daily, and is more tax efficient than mutual funds. It has a significantly lower cost since it is on a passive index. You can diversify by using various ETFs over various asset classes.
Growth of ETFs
Professional investment managers look at all sorts of data points on a regular basis, and utilize that information in decision making. Back in 2011, there was approximately 1 trillion dollars invested in ETFs, as of 2021, there is over 7 trillion dollars invested in ETFs. The number of ETFs for investors to choose from 2,200. There is a lot of variety, and many ways to chose to invest your money.
When we first started building all ETF portfolios in 2004, the idea was to use broad based ETFs for accounts less than a certain amount. That evolved very quickly, and we realized that core ETF models can out perform a lot of more active strategies. We also realized that ETFs could allow firms to scale. We continued to service high net worth individuals, as well as began working with a younger generation.
When selecting an ETF to invest in, you are selecting to participate in the growth of an entire industry or sector. This is a great way for investors to put forth their money into their hypothesis or ideas.
There are different types of technology ETFs that all get different types of exposure. ETF.com has a screener you can use to compare ETFs. When you use this screener to screen for US technology ETFs, you end up with 18 ETFs. You can sort those results by expenses, individual person, etc. When selecting an ETF, the first thing you want to look at is the underlying index. The size of an ETF is also very important, it gives an indication of its daily volume and number of investors out there willing to buy and sell at any given time. Overall, you want to take into consideration the index, the size, the number of securities, the cost, and the expected return of that ETF.
Make sure you’re always using limit orders when trading ETFs. Do not put a market order in for an ETF, ever. Let’s say you’re buying 10,000 shares of something, and the current market price is $50.00 a share. However, at $50.00 a share there may only be 2,000 shares available. If you put in a market order, you’ll get those first 2,000 shares at $50.00, but after that it will start climbing up the price ladder to fulfill your market order. Typically, what you’d do is place your trade, and put a limit order in place for 1 cent above the market order.
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