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Want to add stability to your newly formed portfolio but don't know exactly what that entails? Exchange-traded funds, or ETFs, offer a quick and affordable way to balance any volatility.
Why would you have volatility in the first place? Maybe you're a tech company employee given a pile of shares by your employer. Or perhaps you really wanted to get in on the biotech craze and bought some stocks or sector ETFs without having anything else in your portfolio.
Stabilizing ETFs should have low expenses and steady historical returns that at least match the market. Bonus points go to ETFs that track a market index, rather than a proprietary custom index that's harder for new investors to parse.
Different roads lead to the same general result. So you need to decide on your stabilization strategy. Here are three options to consider.
1. Broad-based ETFs
Want to take an "everything but the kitchen sink" approach to adding stability to a mostly empty portfolio? Broad-based ETFs track all or part of the big name indexes such as the S&P 500 or Dow Jones Industrial Average.
The breadth of these ETFs tends to balance holdings fairly evenly across several sectors and distribute weights so that no single company can overly influence returns.
ETF investors new and old love the iShares Core S&P ETF (NYSEMKT: IVV ) . The highly liquid fund spreads $46 billion in assets across the entire S&P 500. The expense ratio is low at 0.07%, and the dividend yield is around 2%. The fund's net asset value, or NAV, returns were over 20% for the past year. Three- and five-year returns were 18.34% and 6.96%, respectively.
Why should you consider this particular ETF over its competitors? It's a broad option with solid returns, but it also has a lower expense ratio than the even more liquid SPDR S&P 500 ETF, which charges 0.0945%.
2. Dividend ETFs
If you don't need such a big bundle of stability, consider the income that dividend ETFs can provide. Note that you don't want to screen for the highest yield around. Sky-high dividends tend to spell trouble; you're better off sticking with a lower but more dependable yield.
Vanguard Dividend Appreciation ETF (NYSEMKT: VIG ) tracks the NASDAQ US Dividend Achievers Select Index, which contains Nasdaq-listed companies that have paid out increasing dividends for at least the past decade. The ETF has $17 billion in assets, a dividend yield of 2.16%, and a steady history of payouts due to the mature companies that comprise its holdings.
The iShares Select Dividend ETF does offer have a higher dividend yield and better historic NAV returns than Vanguard. But iShares' sectors lean toward utilities and industrials, while Vanguard favors consumer goods and industrials. There's nothing wrong with investing in utilities, but a forthcoming EPA crackdown on coal could cause some bumps.
Vanguard Dividend ETF's screening method for holdings also ensures that holdings remain mature. So this ETF could serve as a core option for a new portfolio.
3. Consumer Staples ETFs
Sector ETFs run the gauntlet from risky biotechs to safe-and-sound consumer staples. Customers have to buy food, toiletries, etc. regardless of the economic climate. A consumer staples ETF could work for you if you want a little bit of stability but have other plans for your core.
The Consumer Staples Select Sector SPDR Fund (NYSEMKT: XLP ) is the most liquid of its sector and has the highest assets. This ETF tracks the S&P Consumer Staples Select Sector Index with $5.3 billion in assets across 42 holdings. Food and staples retailers account for nearly a quarter of the holdings, with household products and beverages close behind.
This ETF was founded in the late '90s, which makes it the one of the wise grandfathers of the funds. The expense ratio is low at 0.18%, and the three- and five-year NAV returns are an impressive 17.53% and 10.15%, respectively.
Why choose the SPDR fund over its competitors? Because it's big, easy-to-understand, and has solid returns. Sometimes it really is that simple.
Foolish final thoughts
Consider pursuing an ETF strategy if you need a dose of portfolio stability but are short on time -- or money. The automatic diversification packed in most of these bundles can even serve as a starting point for a new portfolio.