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Finding the Best US Equity ETFs

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There are a lot of ways to go hunting for the best equity funds, but using exchange-traded funds may be the most practical approach for many investors.

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Gregg Early: I'm here with David Fry, publisher and editor of ETF Digest, and author of the new Amazon.com eBook, The Best ETFs: US Equities. David, I guess the question would be what advantages do you see with ETFs over buying US equities, just outright buying the stocks and creating a portfolio that way?

David Fry: I think for most people it's just much less risk for them to be spread out over an index versus trying to pick stocks. And then with stocks it becomes more difficult to pick the best ones, and how many do you need and so forth.

There's more risk obviously in stocks than there would be in an overall index that's weighted appropriately. That said, most returns this year have been with Apple (NASDAQ:AAPL) because of its oversized weighting in many indexes. If you didn't own Apple, you probably didn't perform that well in 2012.

Gregg Early: Within the context of investing in the indexes, is there any way to-like you said, Apple appears on more than just the Nasdaq Composite Index (INDEXNASDAQ:.IXIC) and there are various tech indexes and things of that nature. So how does an investor weed through that? If they're looking for some strategic exposure, do they just buy a broad index like the Russell 2000 (INDEXRUSSELL:RUT), or should they accumulate ETFs that represent various industrial sectors? How do they begin?

David Fry: Well, what we have done is...in the eBook, for example, there are 600 US equity ETFs. That's a lot to choose from for people. So we have broken it down into the dozen sectors that comprise the US equity ETFs, and then have picked just a few within each sector that are representative enough of that sector in ETFs.

Now the No. 1 thing people have to remember is they need to separate their investment objectives from that of industry sponsors, because everybody wants to have...in the industry anyway, they have business interests and they want you to be involved in their ETF. You really have to separate yourself from them.

So what we've tried to do in the book is to do just that. Nobody is going to buy, of the 600 we have broken it down to around 70, but nobody is going to buy 70 ETFs. But three in each of the categories, whether it be financials or technology or biotechnology or dividends or so forth, will do the job for most people.

They can pick one or two from each of the categories we've selected that are representative of how the indexes overall perform and ETFs overall perform, because there really isn't that much difference one to another when they get really repetitive.

Gregg Early: You're looking to reflect a particular index in each of the sectors.

David Fry: We're interested in fees. We're interested in liquidity. We're interested in assets under management, and if there's any difference in style one to another with a similar index sector then we'll choose that one. But we really don't have to go down into a very deep area to pick something that's just not trading well or is just very repetitive and doesn't make a big difference.
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No positions in stocks mentioned.
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