Methodology

Many investors rely on the methodology developed by Zacks Investment Research when evaluating ETFs. The Zacks ETF Rank system is designed to identify funds with the strongest potential for outperformance based on several key factors:

• Expected asset class returns, which assess the outlook for the ETF’s underlying holdings.
• Expense ratios, since lower costs can significantly improve long-term returns.
• Risk characteristics, including volatility and drawdown potential.
• Momentum and technical indicators, which help identify favorable trends.

ETFs are ranked from #1 (Strong Buy) to #5 (Strong Sell), giving investors a structured framework for comparing funds within the same category.

Common Questions About ETFs

What Are ETFs?

ETFs are investment funds that trade on stock exchanges. Each share represents ownership in a diversified basket of assets, such as stocks, bonds, or commodities. They combine the diversification benefits of mutual funds with the trading flexibility of stocks.

Types of ETFs

Stock ETFs
These funds invest in equities and may track broad indexes like the S&P 500 or focus on specific segments such as growth, value, or small-cap stocks. They are typically used for long-term capital appreciation.

Related: Best S&P 500 ETFs

Bond ETFs
Bond ETFs invest in fixed-income securities such as government or corporate bonds. They are often used to generate income and reduce portfolio volatility.

Sector ETFs
Sector ETFs focus on specific industries like technology, healthcare, or energy. They allow investors to target areas of the economy they believe will outperform, but they can be more volatile due to concentration.

Related: Best Semiconductor ETFs

Commodity ETFs
These funds track physical commodities such as gold, oil, or agricultural products. They are often used as hedges against inflation or geopolitical uncertainty.

International ETFs
International ETFs invest in companies outside the investor’s home country, including both developed and emerging markets. They provide geographic diversification and exposure to global growth trends.

Thematic ETFs
Thematic ETFs focus on long-term trends such as artificial intelligence, clean energy, or cybersecurity. While they can offer high growth potential, they are typically less diversified and more volatile.

Related: Best Dividend ETFs

ETFs vs. Mutual Funds

ETFs

• Trade throughout the day like stocks.
• Typically have lower expense ratios.
• Offer high flexibility and transparency.
• Are more tax-efficient than mutual funds.
• Can be actively managed or index tracking.

Mutual Funds

• Often actively managed with the goal of outperforming the market.
• Typically have higher fees and minimum investment requirements.
• May involve more frequent trading by fund managers.
• Bought or sold at end-of-day net asset value (NAV).
• Index tracking funds are more suitable for long-term, hands-off investors.

Benefits of Buying ETFs

Instant diversification
A single ETF can provide exposure to hundreds or thousands of securities, reducing the risk associated with individual stocks.

Lower costs
Most ETFs have significantly lower expense ratios than actively managed funds, which can improve long-term returns through reduced fees.

Trading flexibility
ETFs can be bought and sold throughout the trading day, allowing investors to react to market conditions in real time.

Transparency
Most ETFs disclose their holdings daily, so investors always know what they own.

Accessibility
Investors can start with as little as one share, making ETFs ideal for beginners and experienced investors alike.

Risks of Buying ETFs

Market risk
If the underlying index declines, the ETF will generally follow. Broad diversification does not eliminate overall market risk.

Sector concentration risk
Some ETFs—especially thematic or sector funds—may be heavily weighted toward a small group of companies or industries.

Liquidity risk
Niche ETFs with low trading volume may have wider bid-ask spreads, increasing trading costs.

Tracking error
Some ETFs may not perfectly replicate the performance of their underlying index due to fees or portfolio construction.

How Do ETF Taxes Work?

ETFs are generally tax-efficient due to their structure. Investors typically pay taxes when they:

• Sell shares for a capital gain.
• Receive dividends or capital gains distributions.

What Happens if an ETF Closes?

If an ETF shuts down, the provider liquidates its holdings and distributes cash to shareholders based on net asset value. Investors may incur capital gains or losses as a result.

Active vs. Passive ETFs: Which Performs Better in a Recession?

Passive ETFs that track broad indexes tend to mirror overall market performance during downturns. Active ETFs attempt to reduce losses through security selection, but results vary widely depending on manager skill and market conditions.

Market-Weighted vs. Equal-Weighted ETFs

Market-weighted ETFs
Allocate more capital to larger companies, often resulting in lower turnover and costs.

Equal-weighted ETFs
Give each holding the same weight, increasing exposure to smaller companies and potentially enhancing diversification—but often with higher volatility.

Are Thematic ETFs a Good Investment?

Thematic ETFs can capture powerful long-term trends, but they tend to be more volatile and less diversified than broad-market funds. They are best used as a small satellite allocation rather than a core holding.

How to Choose ETFs

ETFs or Index Funds: Which Should You Buy?

Both offer diversification and low costs. ETFs are often more flexible due to intraday trading and lower minimum investment requirements.

What Is a Good Expense Ratio for an ETF?

Many high-quality broad-market ETFs charge between 0.03% and 0.10% annually, which is considered very competitive.

What Is “Overlap” and Why Does It Matter?

Overlap occurs when multiple ETFs hold many of the same stocks. Excessive overlap can reduce diversification and unintentionally concentrate risk in a handful of companies—especially large tech firms.

Should You Hold Only ETFs?

Many investors use ETFs as the core of their portfolio while adding individual stocks for targeted opportunities. This hybrid approach balances diversification with potential outperformance.

How to Buy ETFs

Buying ETFs typically involves three simple steps:

1. Open a brokerage account.
2. Search for the ETF ticker symbol.
3. Place a market or limit order during trading hours.

Because ETFs trade like stocks, investors can purchase as little as one share, making them highly accessible.

Does the Time of Day Matter When Buying ETFs?

Trading volume is often lower right after the market opens and just before it closes, which can lead to wider bid-ask spreads. Many investors prefer trading during mid-day hours when liquidity is higher and spreads are tighter.

The Bottom Line

A small group of carefully selected ETFs—such as SPYM, QQQM, IAUM, SCHD, VXUS, and BND—can form a complete, diversified portfolio. By combining exposure to U.S. stocks, global markets, income-producing assets, and defensive positions like bonds and gold, investors can build a balanced strategy designed to weather different market conditions while pursuing long-term growth.