There are currently over 2,000 ETFs in the market with a market capitalization of more than $2.3 billion. ETFs or exchange-traded funds are divided into 13 categories depending on the cost of ownership. They range from funds that track stocks to large cap, small caps, emerging markets, in specific areas of the world, and specific industries. Because they are simple and passive in nature, ETFs have lower expenses than mutual funds.

Despite benefits, ETFs have disadvantages – investors pay an annual expense ratio that can range from 0.01% to more than 1%. This makes the buying and selling of ETFs more expensive than individual stocks.

Nevertheless, ETFs are very popular. Most of the $2.2 trillion sitting in U.S. based ETFs is indexed, meaning that your money is moved automatically to a predefined bunch of stocks. The best ETFs to invest in 2017 list focuses on passive funds. The list has 481 funds that qualify, with $50 million or more in assets and with a net annual expense each that is no higher than 0.4%.

Trading tips on ETFs

Three costs create the rankings of the Best ETFs –

• The expense ratio, which is the fee levied on the portfolio by the fund vendor.
• The big spread/ask price, which is the trading cost which the investor surrenders to intermediaries on entering and exiting a fund.
• The cost offset that is picked up by the portfolio by lending out shares (and bonds) to short-sellers. Share portfolios that specialize in small and speculative companies, have their lending revenue offset the expense ratio, yielding a negative cost of ownership. The lending fee bonanza is seen in iShares Micro-Cap and Schwab Small-Cap. Their net costs over a decade have been -$115 and -95.
• A liquidity score is based on the trading volume and bid/ask spreads (best = 10). You can buy and sell thousands of shares from a fund rated 10 without pushing the price. Always buy a low liquidity fund only if you are going to stay with it for a long time.
• Beyond liquidity, while trading in ETFs, these portfolios cannot be easily hedged. You don’t want to place trades in these funds when the majority of investors are also headed in the same direction. The hard-to-hedge group includes international funds that own shares in the markets that are closed abroad when you’re buying or selling the ETF. This would include iShares Micro-Cap, which specializes in illiquid stocks.

Avoid: Over the last ten years leveraged ETFs have become very popular. They use derivatives or borrowed money to increase their exposure to a certain index, or track the inverse of that index’s performance.

What to look for

First and foremost, you want your ETFs to be cheap. A difference of a few dollars every year can make a big difference on the long-term returns. To establish the cost of an ETF, look at the expense ratio, which explains the total cost of investing which is your percent of investment every year. An expense ratio of 0.5% means you will pay $5 annually for every $1,000 you invest. The ETF tracks its own index and because shares and stocks are bought and sold, and it is hard to maintain 100% efficiency. You can check the ETFs performance on the website.

For instance, a one of the best ETFs to invest in is the Vanguard S&P 500 ETF owns 500 stocks in the index; the charges are at a low expense ratio of 0.05% – for every $10,000 that you invest, and you pay $5 in fees per year.

With that in mind, here are some good ETFs to check out in various categories:-

• Vanguard Small-Cap ETF
• iShares Core Russell US Growth
• Schwab US Large-Cap Value ETF
• Vanguard FTSE Developed Markets ETF
• Schwab Emerging Markets Equity ETF
• Vanguard High Dividend Yield ETF
• Vanguard Long-Term Government Bond ETF
• SPDR Bloomberg Barclays Intermediate-Term Corporate Bond ETF
• Sector ETFs

Health Care SPDR: The health care includes pharmaceutical companies, biotechnology firms, medical device manufacturers, hospitals, and more. An aging population with advances in medicine, the health sector is on the edge of becoming a top-performing sector in the future.

Energy Select Sector SPDR: Energy includes oil and natural gas producing companies. Oil is a limited resource, and the prices tend to be higher, and the prices for energy stocks follows suit.

Utilities Select Sector SPDR: Utilities include services like gas, electric, water, and phone. Health utilities are needed during market downturns, which make these stocks good.

Consumer Staples Select Sector SPDR: If you want to diversify into defensive stocks, then consumer staple sector is a good way. Consumer staples are items they buy for a daily living these include healthcare, food, utilities, alcohol, and tobacco. The expense ratio is 0.14 or $14 annually for every $10,000 invested.