With Hundreds of ETFs to Choose From, Where Do I 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. (I explain these terms in Chapters 5 through 8.) You can also diversify your stock ETFs by industry sector: consumer staples, energy, financials, and so on. (See Chapter 10 for a discussion of sector diversification.) Generally, I wouldn’t attempt to use separate ETFs to accomplish both grid diversification and sector diversification; doing so would require an unwieldy number of holdings.