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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: So liquidity is a big factor in what you're looking at. That gives the investor a way in and a way out without having to deal with spreads.

David Fry: That's right, and with good assets under management and liquidity you get better tracking of the underlying index, and that's important to people. Also fees are important, so we try to pay attention to that too...but sometimes a good index will outperform another just because. Fees make a difference, but they're not the only difference.

Gregg Early: Were there any surprises in running those screens? Did you end up with maybe a boutique firm here and there that popped into the No. 1 place, even though you had larger organizations with probably significantly more assets under management, and things of that nature?

David Fry: Right, so I'm obviously offending some issuers, but the point is really for investors to separate their interest from the issuers. When we went through the group, we could find maybe one or two or three within each sector.

For example, in financials there's 40 different ETFs available to track financials in that sector. People really need some help in figuring out which of those are most suitable to them and helpful to them, then building a portfolio maybe from the universe of equity sectors that are important to them, suit their objectives.

Gregg Early: Is there a particular sector that you could speak about and sort of talk about maybe a couple of the funds that you found in the particular sector? The entire process, walking it through for us.

David Fry: Well, the big thing right now of course for investors is our demographics. We see a lot of people gravitating towards dividends, and that's been the biggest area of growth of new issues, because frankly the US equity sector is pretty well saturated in terms of ETFs. We see a big move towards dividends.

Let's say we take the biggest and oldest, which is DVY, which is the Dow Jones Select Dividend ETF (NYSEARCA:DVY). DVY was one of the first issued. With that particular focus, and with that said, if people are not in an IRA or 401(k) and they're retirees-which is where the big trust has been for the attraction of dividends-and now we approach the fiscal cliff, dividends may be taxed as ordinary income instead of the 15% that currently exists.

You see now there are over 70 companies, for example, that have just issued special dividends to take advantage of the 15% preference on dividends. There's going to be a problem coming up very soon with dividend issues if they lose that preference, unless of course the dividend sectors are in a tax-exempt account.

Editor's Note: This article was written by Gregg Early of MoneyShow.

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