Creating An Etf Investment Strategy With Fidelity

Exchange-traded funds (ETFs) are a popular investment vehicle due to their potential for diversification and low costs. ETFs are baskets of securities that can be traded on a stock exchange through a brokerage firm. They are similar to mutual funds but trade on exchanges like stocks, providing liquidity and flexibility.

Fidelity Investments offers a range of ETFs, including active equity, fixed income, thematic, sustainable, and more. To invest in ETFs on Fidelity, you need to open and fund an account, research ETFs that align with your financial goals, and then buy the ETF using its ticker.

This paragraph introduces the topic of how to create an ETF-like investment using Fidelity Investments' platform and tools.

How to choose an ETF

There are thousands of ETFs available, so it can be challenging to know where to start. Here are some key factors to consider when choosing an ETF that's right for your investment goals.

• Role in your portfolio: First, you need to understand the role you want the ETF to play in your portfolio. Are you looking for a foundational building block or specific exposures to fill gaps? Knowing this will help you decide on the right type of ETF for your needs.
• Active vs. passive: There are two main types of investing strategies: active and passive. Active ETFs generally have one or more professional managers who decide what to include in the ETF and aim to beat the performance of an index. Passive ETFs, on the other hand, aim to track the performance of an index and often hold the same investments as the index. Some investors prefer one strategy over the other, while others use a mix of both.
• Underlying investments: It's important to understand what the ETF owns. While some ETFs are straightforward, such as those that track a specific index, others are more complicated. For example, some commodity-tracking funds hold physical stockpiles of the underlying commodity, while others use derivatives.
• Performance: While past performance doesn't guarantee future results, it's still useful to look at how the ETF has performed relative to its benchmark. For passive ETFs, you typically want to see performance closely in line with its index. For active ETFs, look for performance that beats the benchmark over longer periods.
• Expense ratio: This is the cost of investing in a given ETF, usually expressed as a percentage of assets managed. Many investors choose ETFs for their low-cost structures, so this is an important factor to consider.
• Issuer/sponsor: The issuer or sponsor is the company that offers and manages the ETF. Some investors, especially for core portfolio holdings, prefer to go with an established provider with a strong reputation and long track record.
• ETF ratings: Many ETFs receive ratings from firms that analyse their performance. These ratings can give you additional insight into how well the ETF is managed in terms of cost, efficiency, and other factors.
• Trading volume: Trading volume is an indicator of liquidity. Generally, the higher the trading volume, the more liquid the ETF is likely to be.
• Level of assets: An ETF with a higher level of assets is likely to have more investor interest, translating into better liquidity. A common threshold is at least $10 million in assets.
• Underlying index or asset: Consider the underlying index or asset class the ETF is based on. For diversification, it's often preferable to invest in an ETF based on a broad, widely-followed index.
• Tracking error: Most ETFs track their underlying indexes closely, but some deviate. Choose an ETF with minimal tracking error.
• Market position: The first ETF issuer for a particular sector often gets the most assets, so it's best to avoid imitations of original ideas.

You can use an ETF screener to help you evaluate and compare ETFs based on these criteria and narrow down your choices.

How to open and fund an account that can trade ETFs

To open and fund an account that can trade ETFs, you'll need to follow these steps:

• Open a brokerage account: You can open a brokerage account online, and many brokers offer commission-free ETF trades and have no account minimums, transaction fees, or inactivity fees.
• Fund your account: Once you have an account, you'll need to deposit money into it to start investing in ETFs.
• Research ETFs: Before placing any trades, it's important to do your research. Read up on the fund's objective and strategy, investigate what a fund invests in, and consider the fund's expense ratio.
• Buy the ETF using the ticker: A "ticker" is the short letter code associated with a given ETF, which is used to communicate trade orders to exchanges.
• Decide when to sell: It's important to have a clear plan for when to sell your ETF to maximize profits or minimize losses.

Fidelity offers a range of ETFs, including active equity, fixed income, thematic, sustainable, and more. You can use their ETF screener tool to research and compare different ETFs to find the right ones for you.

How to research ETFs that align with your financial goals

Before investing in any exchange-traded fund (ETF), it's important to do your research to ensure that it aligns with your financial goals. Here are some key considerations to help you make an informed decision:

• Understand your investment goals: The first step is to clearly define your investment objectives. Are you looking for diversification, specific company characteristics, lower-cost alternatives, or simply wanting to invest in a popular trend? Knowing what you want to achieve will help you choose the right ETFs.
• Time horizon: Consider how long you plan to invest for. Generally, it's not advisable to invest money that you might need within the next five years. Ensure that your investment horizon aligns with your financial goals and other short-term and long-term priorities.
• Asset class: ETFs typically hold a variety of assets, including stocks, bonds, commodities, currencies, and alternative investments. Identify the asset class that aligns with your goals and risk tolerance. For example, if you're interested in investing in stocks, look for ETFs that focus on equity-based funds.
• Geographic focus: ETFs can have a global reach or be specific to certain regions, countries, or states. Choose ETFs that invest in the geographic areas you're interested in.
• Segment: Consider the size of the companies you want to invest in (large, mid, small, or micro-cap) and the specific industry sectors (e.g., technology, energy, healthcare). This will help you narrow down your ETF options.
• Investment style: ETFs can align with your values and investment strategies. For instance, you may want to invest in growth- or value-based funds or actively managed funds.
• Holdings: ETFs are usually based on indexes, and their holdings are often made public daily. Review the holdings of the ETF to ensure they align with your goals and risk tolerance.
• Expenses: Pay close attention to the expense ratio, which represents the annual administrative expenses of the ETF. Compare the expense ratios of different ETFs to find the most cost-effective options.
• Performance: While past performance doesn't guarantee future results, it's important to consider how the ETF has performed over time. Compare its performance with relevant benchmarks to assess if it has met its goals.
• Liquidity and stability: Consider the liquidity of the ETF, which refers to how easily you can buy or sell it. Additionally, look into the stability and track record of the ETF provider to ensure they have a proven history in the market.
• Risk and volatility: Understand the risks associated with the ETF, including market volatility, potential closure due to insufficient assets, and tracking errors. Evaluate these risks based on your risk tolerance and investment goals.
• Research tools: Utilize research tools and screeners offered by brokers and third-party firms to compare different ETFs. These tools can help you filter ETFs based on various criteria, such as asset class, performance, expenses, and holdings.

Remember, investing involves risk, and the value of your investments may fluctuate. Always do your due diligence and consult with a financial advisor if needed to make informed investment decisions.

How to buy an ETF using the ticker

To buy an ETF using its ticker, you must first open and fund an account that can trade ETFs. Most brokerage accounts allow you to trade ETFs, and some retirement accounts, like IRAs, do too. You'll then have to deposit money into the account to start investing in ETFs.

Next, research ETFs that align with your financial goals. It's important to thoroughly read a fund's objective and strategy, investigate what a fund invests in, and research the fund's expense ratio. Many brokerages have internal tools to help you research ETFs, and there are also third-party research firms, like Morningstar, that can give you helpful insight.

Once you've found an ETF that suits your goals, keep its ticker handy. A "ticker" is the short letter code associated with a given ETF—for example, "ABCD". Input the ticker into your brokerage's trading function when you're ready to execute the trade and buy the ETF.

It's important to keep in mind that investing involves risk, and the value of your investment will fluctuate over time. You may gain or lose money.

How to decide when to sell an ETF

When deciding whether to sell an ETF, there are several factors to consider. Here are some guidelines to help you make that decision:

• Tax implications: Understand the tax consequences of selling your ETF shares. Generally, if you hold ETF shares for one year or less, the gain is short-term capital gain, taxed at the same rate as your ordinary income. If you hold them for more than a year, the gain is long-term capital gain, typically taxed at a lower rate. However, there are exceptions, such as gains on currency ETNs (exchange-traded notes) taxed as ordinary income and gains on certain ETFs structured as master limited partnerships, which may be taxed at higher rates. Consult a financial advisor or tax professional to determine the impact of taxation on your specific situation.
• Portfolio adjustment: Selling an ETF can help you adjust your portfolio to align with your investment goals. Diversification can reduce risk by spreading your investments across multiple assets, sectors, or risk levels. If one sector underperforms, selling an ETF can allow you to reallocate funds to better-performing areas.
• Price target: Setting a price range for selling can help you make a profit. When the ETF reaches your target range, you can sell all at once or gradually over time as it hits different price targets.
• Fundamental changes: Keep an eye on the company's fundamentals, such as quarterly earnings, sales, revenue, and management performance. If these deteriorate or fail to meet expectations, it may be wise to sell.
• Time in the market: Consider your time horizon and investment goals. If you need the money in the short term or are nearing retirement, you may need to sell sooner to free up capital or reduce risk.
• Technical analysis: Use tools like moving averages to analyze stock price shifts and set up preset sell signals. For example, if a stock's 50-day moving average crosses below its 200-day moving average, it may indicate a change in trend or deteriorating fundamentals, prompting a sale.
• Trading time: The best time to trade ETFs is often closer to the middle of the trading day, as the bid-ask spread tends to be widest right after the market opens. Avoid trading immediately at the market open or close, especially for ETFs with securities in multiple time zones.
• Bid-ask spread: Check the bid-ask spread on the ETF. The smaller the spread, the better, as it minimizes your buying and selling costs. Higher-volume ETFs typically have narrower spreads due to increased market maker competition.
• Limit orders: Use limit orders to specify the maximum price you're willing to pay when buying or the minimum price you're willing to accept when selling. This protects you from paying too much or selling for too little, especially when the bid-ask spread is wide.

Frequently asked questions