by Andrew Horowitz

In our prior two articles, we have been discussing quick and dirty tips for exchange-traded funds, or ETFs.  We compared ETFs to mutual funds, and then discussed the three most popular major US stock market ETFs - the Diamonds, the Spiders, and the Quad-Qs.  In this article, we'll take a quick look at different types of ETFs that you can use to balance out your growing portfolio into areas beyond stocks.

Stock Market Specific ETFs

Before we get to into the exotic areas you can invest in with ETFs, let's briefly go over a few stock market specific ETFs that can give you additional exposure to segments of the market so that when a certain sector is “on fire” or outperforming the broader market, you can get involved.

For example, if you wanted to have a diversified exposure to financial stocks, such as banks or investment companies, you could purchase the financial ETF known by the symbol "XLF."  If you think the financial sector is about to come alive, then you could add XLF to your portfolio instead of buying 10 or so bank stocks that you pick on your own. Why not just diversify by investing in a broader basket of financial-related companies with a single purchase with a single commission to spread the risk?

In the same way, if you think the technology sector is going to outperform over the next few months or years, you can invest or trade the technology-based ETF known by the symbol "XLK."  That would not give you as much exposure or diversification as the QQQQ which is the NASDAQ 100 ETF, but it would zero-in with a laser focus on those technology stocks that might add extra return to your portfolio.

Major Sector ETFs

Without giving specific details, which you can find at any free finance-related website like Yahoo or Google finance, you can use the following major sector ETFs to gain exposure to a sector which you think will outperform the broad market like the S&P 500:

Consumer Discretionary (Retail, housing, leisure):  XLY

Consumer Staples (things we have to have like toothpaste and cleaning supplies):  XLP

  • Energy:  XLE
  • Financial:  XLF
  • Health Care:  XLV
  • Industrials:  XLI
  • Materials:  XLB
  • Technology:  XLK
  • Utilities:  XLU

For a better description of these major sector ETFs, you can visit the free resource at http://www.sectorspdr.com.  Broadly, these are called "Sector SPDRs" which stand for "Standard and Poor's Depository Receipts."  You can find fact sheets, descriptions, prospectuses, and additional information at this website.

How to Use ETFs to Get Exposure to Other Markets

Beyond stock market specific ETFs -- and there are many others beyond what I have listed for you above-- you can use ETFs to gain exposure to markets you might not have thought possible!

Bond ETFS: For example, there are a number of different types of bond ETFs, which behave similarly to actual bonds, but you can buy or sell them at any time.  The most popular of these trades with symbol "TLT" which is the iShares 20+ year Treasury Bond fund.  Some investors like to rotate into this when they think the stock market might be about to head lower, which provides a safety net if the market does fall... or diversification if it doesn't.  You still get dividends from the TLT just like you'd get interest from actual bonds!

Foreign Country ETFs: You can also get exposure to foreign countries with ETFs as well.  If you think China will continue to grow economically as their population expands, you can invest through the ETF symbol GXC or FXI.  To invest in Russia, check out ETF symbol RSX, India EPI. What is probably most appropriate for many aggressive investors wanting international exposure is to select a broad-based international ETF like the Emerging Market fund with symbol EEM.

Currency ETFs: Beyond foreign ETFs, you can invest in currencies like the US dollar by using ETF symbol UUP.  Or you could invest in the euro without converting money by using ETF symbol FXE.

Commodity-Based ETFs: If you want to invest in gold without having to buy a warehouse or a safety deposit box, you could use ETF symbol GLD.  To speculate in crude oil, or to invest in it if you think prices will keep going up, you could use symbol USO for the US Oil Fund. But keep in mind that commodity-based ETFs and exchange-traded notes will not always track the underlying index perfectly or as closely as a stock market fund will because there are some additional problems to be aware of when investing in futures-related ETFs.  Be sure to read the prospectus or do some additional research before investing in any fund mentioned above.

Keep in mind that there are over 500 plus ETFs out there, and it always seems like a few more pop up every month.  Stick only with those that have plenty of volume, which means those that are most liquid.  The quick and dirty tip is to try not to invest in an ETF that trades less than 50,000 shares per day.

I hope you're learning how ETFs can diversify your portfolio and give you access to investments you typically couldn't make without having to do additional leg-work.

Keep with us as we discuss even more ways to become a winning investor in our next podcast! If there’s a question you’d really like to ask, just email me at winninginvestor@quickanddirtytips.com wishing you all the best on your quest to investment success. or call 206-338-0836. That’s 206-338-0836 and maybe your question will appear on the show.

And if you like the show, tell a friend or leave a review on iTunes. Until next time, this is Andrew Horowitz with The Winning Investor’s Quick and Dirty Tips for Beating the Market.