It's easy to use exchange-traded funds to put together a solid investment portfolio. In fact, many investors keep things as simple as possible, buying just a handful of funds to cover major asset classes like stocks and bonds. The largest funds in the market tend to have the broadest scope, including hundreds or even thousands of different stocks within a single investment vehicle.
Although it's possible to put together a completely adequate investment portfolio using these massive ETFs, you can miss out on some interesting opportunities by doing so. Instead, looking more closely at some ETFs that aren't quite as closely followed as the industry's giants can give you an edge. Below, we'll look at three ETFs that often go unnoticed but offer compelling reasons for investors to pay closer attention.
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2 ways to get smaller stocks
Because most of the largest ETFs in the business have stock portfolios that are weighted by market capitalization, the net result for most investors is that they end up with very large allocations to the biggest stocks in the market. That's fine for those who aren't concerned with exactly what type of exposure they have to the stock market, but it doesn't always lead to the best results. Smaller companies often outperform their peers, especially during periods in which international issues play a more important role in presenting business challenges.
With that in mind, investors have a couple of choices when it comes to thinking smaller. The Vanguard Mid-Cap ETF takes you out of the S&P 500 world entirely, instead going with businesses that haven't quite attained large-cap status. Many of these mid-cap stocks have the potential to go to the next level in the near future, and ETF investors can cash in on their growth prior to making that transition.
If you're committed to sticking with large-cap stocks but are willing to take a different approach, the Invesco ETF offers an alternative. This equal-weight ETF owns exactly the same stocks as a typical S&P index fund, but instead of owning the stocks in proportion to their market capitalization, the Invesco ETF simply invests the same dollar amount in each of the 500 stocks in the index. That simple difference has led to outperformance, as the smaller members of the S&P 500 tend to have more domestic-focused businesses that are less vulnerable to pressure from trade and tariffs.
Getting out of stocks entirely
Meanwhile, some investors have decided that the prospects for the stock market look dicey at best for the foreseeable future, and they're looking more seriously at other types of assets. Real estate looked like a poor choice coming into 2019 because of the potential for higher interest rates disrupting investors' access to financing, but the reversal in rates has sent shares of real estate investment trusts, or REITs for short, climbing sharply.
You'll find a wide variety of different types of REITs in the iShares ETF, including those focusing on retail, residential, industrial, office, healthcare, hotel, and other types of real estate. There is some danger to investing in REITs, because if the economy surges higher and interest rates rise again, prices of REIT shares tend to come under pressure. Nevertheless, real estate exposure can be a good diversifier for an investment portfolio.
Go beyond the basic
Many people don't look past the biggest ETFs in the market, but these three funds offer some attractive features. Using them to spice up your portfolio could continue to be a winning move as 2019 continues.
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