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5 Factors to Consider Before Investing in an ETF

By U.S. News & World Report

There are now over 1,600 exchange-traded products available to investors, and total assets are quickly approaching $2 trillion. Traditionally, the primary way an investor could get access to a diversified portfolio of stocks was through a mutual fund. But today, many of these investment products mirror the overall market, providing very little differentiation. Good managers are hard to come by. This, coupled with sometimes high expenses, has resulted in subpar performance for much of the mutual fund industry.

If an investor’s goal is to replicate the holdings of an index, another investment option is the often low-priced exchange-traded fund. However, there are complexities in this emerging investment class. With the continued interest in utilizing exchange-traded products for investors’ portfolios, it’s crucial to consider a number of things before you invest in an ETF.

1. Investment objective. Are you looking to invest in a broad market index, or are you more laser-focused on specific sectors or themes? If you’re looking for broad-market or index exposure, ETFs can be a low-cost, well-diversified option with potential tax-efficient components for an investment portfolio. For example, gaining exposure to the Standard & Poor’s 500 index through the SPDR S&P 500 ETF (symbol: SPY) or looking for access to the Dow Jones industrial average through the SPDR Dow Jones Industrial Average ETF (DIA) is straightforward. There’s not a lot of research needed, since those products track the performance of the corresponding index, minus expenses.

However, it is a much different story when you’re looking to gain sector or theme exposure because it’s crucial to know which stocks are owned within the ETF. If you’re looking to gain exposure to the energy sector, the Market Vectors Oil Services ETF (OIH) may pique your interest. However, if you look under the hood, you will find that you’d own only 26 companies. Additionally, OIH is very top-heavy with virtually 20 percent equity in Schlumberger and almost 12 percent in Halliburton. The question then becomes: Are you better off just owning those individual companies and removing the expense of an ETF? Conversely, you may not be accomplishing your goal of diversification if you’re invested in a concentrated ETF. In those cases, you may consider a broader ETF. Exchange-traded funds concentrating in specific industries are subject to higher risks and volatility than those that invest more broadly.

2. Tax features. Another factor to consider is taxation of the ETF. Most products have a structure that is taxed at capital gains rates. However, there are some that hold derivatives, which could require a Schedule K-1 tax form. If you’re looking for exposure to commodities (particularly precious metals), you may be subject to the collectible tax rate. You should consult with your tax advisor before making an investment in an ETF or you could create some unintended headaches.

3. Fee structure. You should also do some research in regards to the fees associated with owning an ETF. One of the benefits of investing in ETFs is their low-cost nature. However, many people do not know that the published expense ratio only covers management, administration, custody and auditing fees. There are additional costs that aren’t included in the expense ratio, such as brokerage fees, rebalancing costs and trading spreads. You should understand this total cost of investing prior to making an investment decision.

4. Product structure. Knowing the difference between an exchange-traded fund, which actually owns the underlying securities, versus other exchange-traded products, which may have different structures, is an important consideration. There are often key differentiators to be aware of before investing.

5. Performance. Lastly, you want to have an understanding regarding the expected performance of the exchange-traded fund. In most cases, the goal of investing in an ETF is to closely track the performance of an index or sector. With the proliferation of ETFs, there are a number of them that come up short in this regard. This may lead to large tracking errors or discrepancies between the benchmark and the underlying fund, which defeats one of the primary purposes of these investment products.

While ETFs are quickly becoming a popular investment in the marketplace, consider these five factors before investing in an ETF. Be sure to consult with your investment advisor before making any changes to your portfolio.

Brett Carson , certified financial advisor, is the director of research for Carson Institutional Alliance .

Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through CWM LLC, a registered investment advisor and separate entity from LPL Financial. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not protect against market risk. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.

An investment in exchange-traded funds, structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. Investment in ETFs also involves additional risks such as not being diversified, price volatility, competitive industry pressure, international political and economic developments and possible trading halts.

Investors should consider the investment objectives, risks, charges and expenses of the exchange-traded fund carefully before investing. The prospectus and, if available, the summary prospectus contain this and other important information about the exchange traded fund. You can obtain a prospectus and summary prospectus from your financial representative. Read carefully before investing.

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5 Factors to Consider Before Investing in an ETF originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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