How to Diversify Holdings With EFTs
Over the last few years, a new breed of mutual fund has become available to investors seeking liquidity and lower costs. These funds, called exchange-traded funds (ETFs), trade on the major exchanges and behave just like stocks, except that they offer the same type of diversification and professional management available in traditional funds. Over 350 different exchange-traded funds are now available, and the number is continuing to grow.
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Instructions
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Ask your broker to recommend some EFTs, or can do a search online for them. These funds cover all types of investment objectives, so regardless of what you're trying to accomplish, there will be a fund that fits your needs. There are EFTs for growth, income, specific sectors and other areas of specialty. You will purchase an EFT in exactly the same manner as a stock, by placing a trade either directly or through your broker.
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Use EFTs to generate some capital losses or diversify your portfolio. They are excellent tools for either task. If you have individual stocks or other mutual funds that are performing poorly, you can sell them and purchase a similar ETF instead. For example, if you own one or more blue-chip stocks that have dropped in value, then you can sell them and purchase an ETF that invests in blue chip stocks. This provides you with both additional diversification and a reportable loss, and the wash sale rules are also satisfied because you are buying a different security.
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Use an EFT as a substitute for a current holding. If you have a holding that is down that you want to hold onto for the long term, it is quite possible that you can find an ETF that holds your security. Therefore, if you sell your holding and purchase that ETF, then you will effectively retain a portion of ownership in your holding while lowering your overall risk through diversification. Since numerous studies have shown that the majority of return on equity is due to asset class as opposed to individual stock selection, it is possible that you will realize a similar rate of growth from your new fund holding.
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Tips & Warnings
ETFs involve market risk and the possible loss of principal. For more information on these funds and how they work, consult your financial advisor.
