How to Choose an ETF: The Foundation of a Successful Strategy

When it comes to the world of investing, few trends have been as popular as the growing ETF market. Exchange-traded funds (ETFs) are tradable products that can be bought and sold on the market like regular stocks, and track groups of equities, bonds, etc. For instance, if you were interested in investing in sustainable/green stocks but couldn’t decide on a single security, you might consider investing in an ETF that specifically tracks sustainable stocks. In doing so, you diversify your portfolio among different securities while retaining your focus on sustainability.

But how should I choose an ETF? Just a quick Google search of ETFs leads to hundreds of different funds, all tracking different sectors and securities. Well, you should start by narrowing down your fields of interest. Investors, besides investing for profit, invest in what they believe. So, if you are driven by a passion for climate advocacy, you should consider investing in a climate-themed ETF. If tech is your forte, consider an ETF that tracks that sector. In doing so, you are investing in what you are passionate and knowledgeable about.

Of course, investments have their inherent risks, and the vast ETF market is no different.

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First, check the internal composition of the ETF, specifically how its portfolio is weighted.Are you a risk-tolerant investor? -- than consider ETFs that heavily weigh stocks (1). Risk-averse? -- try ETFs that feature low-risk bonds. By checking how a portfolio is weighted, you can get a high-level overview of how well an ETF matches your risk tolerance. Also consider how popular your ETF of choice is. Generally, the more popular with investors an ETF is, the more likely the fund is effectively managed and safe for investors (2).

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Alinea gives you the option to trade playlists—our version of the ETF.

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The same criteria apply to choosing a playlist: What do you value? What are your interests? What is your risk tolerance? Making smart investments is all about looking under the hood before you put your money in. But beyond that, smart investments are made by people who invest in what they believe in.

Sources:

1 https://www.fidelity.com/learning-center/investment-products/etf/choose-right-etf
2 https://www.schwab.com/resource-center/insights/content/etf-investment-strategies-how-to-pick-an-etf

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