How do I Choose the Best Financial ETF?

Choosing the best financial ETF requires knowing about how financial markets work and what is included in a particular fund. An exchange traded fund or ETF is a specialized financial product that allows investors to buy into a bundle of equities with enhanced trading access, for example, intraday trading ability. With ETFs, the broad selection makes it important to use research and consideration of overall goals to pick the right funds.

One thing that investors should consider with a financial ETF is the “scale” of the fund. Financial ETFs can consist of local equities, U.S. holdings, or an international "grab bag" of financial stocks and securities. It’s also a good idea to evaluate what part of financial markets the ETF is built on. For example, does the ETF consist of stocks representing insurance companies? Are banks and major lenders integral to the fund make-up? These questions can help pick “sector financial ETFs.”

Traders can also consider how a financial ETF is set up. Some of these funds have a good deal of leverage, where the initial value of stocks and securities may be multiplied by certain ways of “doubling down” on gains or losses. Traders must understand how their funds are leveraged, because the higher leveraged fund will produce more gains and losses, thereby exposing the holder to more risk as well as a bigger chance at large gains.

Those who are interested in a particular financial ETF can also inquire as to how the fund is weighted. Some ETFs are “equally weighted” where there is no emphasis on any one equity. Others are weighted according to the immediate value of each part of the “bundle.” In general, some ETFs are more actively managed, where leadership may pursue more aggressive strategies for gains. Knowing about how a fund is handled is a key part of doing necessary research before buying.

Investors should be able to access real-time information about their ETF through a brokerage or other source. Part of the immense value of ETFs to the common investor is the ease with which these funds can be tracked and ultimately traded. Look for the most credible ETF offers with the best resonance for a specific portfolio.