While investors can use ETFs to go triple long or triple short or invest in specific countries or commodities, some products should be avoided.ETFs empower investors by allowing them behind the velvet rope of investing and into a world of exotic strategies. While many of the narrow and broad ETF strategies can help investors transform their investments, the answer is never "one size fits all." Every day I work with investors to assess which ETFs fit their needs to design custom portfolios that work. In the course of these discussions, I often find myself returning to basic tenets of ETF investing. I have detailed three of the most important: appropriateness, liquidity and concentration.
ETFs such as S&P Depository Receipts ( SPY) and Financial Select SPDRs ( XLF) see millions of shares trade hands every day. These ETFs are particularly easy to buy and sell and they tend to trade close to NAV. Read "ETF Investors: Look for Liquidity" for more on liquidity. Nearly 50 ETFs were forced to close their doors in 2008 due to lack of investor interest. The tremendous amount of money that is currently flowing into ETF funds, however, is helping to fuel a new expansion in the industry. In the rush to provide products, it is likely that not every ETF that hits the market will be viable. Volume is one good way to measure viability. Look for funds that trade more than 100,000 shares per day; anything less may require trading in smaller blocks of shares.