Transcripts

""Money File"-ETF Investing 101

SUSIE GHARIB: In the "Money File" tonight, the ABCs of ETF investing. Here's Jason Zweig, personal finance columnist at The Wall Street Journal.

JASON ZWEIG, PERSONAL FINANCE COLUMNIST, THE WALL STREET JOURNAL: If you think it's time to buy an exchange-traded fund, what should you look for? These portfolios, also called ETFs, have taken the investing world by storm, roughly tripling since 2005. There are now nearly 800 ETFs managing roughly $600 billion. These portfolios hold many different investments in a single package, just like a traditional mutual fund. But the package itself trades on an exchange just like a stock; you can buy or sell any time. Here are three simple guidelines when you are looking to invest in an ETF. A, be sure the ETF is very diversified. Find out how many stocks the ETF owns by checking its portfolio holdings. I would avoid ETFs that own fewer than 50 stocks. B, see how much the ETF will cost you by looking up its annual expense ratio. You should almost always be able to find an ETF that charges less than one-half of 1 percentage point in annual expenses. C, whatever you do, stay away from any ETF that uses what's called "leverage" in the hope of beating the market. Watch for code words like "ultra," "inverse," or "2X," which definitely deliver more risk but give no guarantee whatsoever of a higher return. Those are the ABCs of ETFs. I'm Jason Zweig.