Factors that should guide your ETF choices

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If you are looking to diversify your portfolio, consider purchasing exchange-traded funds, or ETFs, which are baskets of securities pooled in one investment. Typically, ETFs can be lower in cost and also offer less risk than other investments.

In general, a vital factor that will drive your ETF selection is the funds’ investment process.

"Whether they track and index, are actively managed, or fall somewhere in between, ETFs’ investment process will have the greatest impact on their long-term returns and the level of risk they take in generating those returns," said Ben Johnson, director of global exchange-traded fund research for Morningstar.

Cost considerations

Costs are important to consider when researching and buying ETFs.

ADVICE FOR THE FIRST-TIME ETF BUYER

"Every penny an investor pays in fees is a penny that doesn’t grow to be a nickel, a dime, or a quarter over the long term," said Ben Johnson, director of global exchange-traded fund research for Morningstar.

Keeping a tight rein on fund fees is a key ingredient in long-term investment success, said Johnson.

Understand tax efficiency

According to Johnson, ETFs tend to be more tax-efficient relative to traditional open-end mutual funds.

"ETFs’ superior tax efficiency has been a key differentiator in recent years, as many mutual funds have been plagued by investor withdrawals, which have resulted in regular and often large taxable capital gains distributions for investors," he said.

PICKING AN ETF: EXPERTS WEIGH IN

Tracking performance

Tom Lydon, vice chairman at VettaFi, said performance covers points like returns, risks and how the investment holds up in various market conditions. Many companies will provide the performance history of ETFs to help you make informed investing decisions.

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Consider your time horizon and goals

Lydon said beyond picking an ETF based on their individual merits, an investor should also consider his or her individual investment goals and investment time horizons.

"Someone who is in their 20s and is just starting to build an investment portfolio may have more leeway to take on greater risks to enhance capital growth as compared to someone in their 70s who is relying on a stable retirement nest egg to generate a steady income for his or her Golden Years," he said.

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