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With Hundreds of ETFs, Where Do You Start?

The answer depends on your objective. If you are looking to round out an existing portfolio of stocks or mutual funds, your ETF should complement that. Your goal is always to have a well-diversified collection of investments. If you are starting to build a portfolio, you want to make sure to include stocks and bonds and to diversify within those two broad asset classes.

There is not much in the world of stocks, bonds, and commodities that can’t be satisfied with ETFs. Try to have both U.S. and international stock ETFs. And within the U.S. stock arena, aim to have large cap growth, small cap growth, large cap value, and small cap value.

You can also diversify your stock ETFs by industry sector: consumer staples, energy, financials, and so on. Generally, you shouldn’t attempt to use separate ETFs to accomplish both grid diversification and sector diversification; doing so would require an unwieldy number of holdings.

On the bond side of your portfolio, you want both government-issued bonds and corporate bonds, and if you’re in a higher tax bracket, you want municipal bonds as well. For more conservative portfolios in which bonds play a major role, foreign bonds may offer added diversification.

Although most ETFs are somewhat reasonably priced, some are more reasonably priced than others. If you are going to pay 0.50 percent a year in operating expenses for a certain ETF, you should have a good reason for doing so. Many ETFs are available for under 0.30 percent, and some for even less than 0.10 percent.

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