Investors are drawn to the best performing ETFs because they have low management fees, adequate diversification, and are more tax-efficient than many other investments

ETFs are unlike other investment innovations because they aim to simplify your investing, rather than complicate it. While there are many to choose from, the best performing ETFs can be a great low-fee way to hold shares in multiple companies within a single investment.

How to Make Money with ETFs Learn everything you need to know in 'The ETF Investor's Handbook' for FREE from The Successful Investor. ETFs Guide for Canadian Investors: Find the best way to invest in ETFs with low fees, low risk & high satisfaction.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Utilizing the best performing ETFs for foreign market investing         

If you do want to add more foreign exposure, you can in many cases buy individual stocks traded on foreign exchanges. But for most investors, directly investing in foreign stocks can add an extra layer of risk and expense. As well, timely and accurate information about overseas companies is not always available, and securities regulations vary widely between countries. It can also be hard for your broker to buy shares on foreign markets without paying a premium. Tax rules and restrictions on transferring funds between nations add further uncertainty and cost.

We think one of the best ways to invest in foreign (non-U.S.) markets is through ETFs. You could add some of these ETFs in reasonable quantities, perhaps 10% of your holdings if you’re a conservative investor (including 5% or so in higher-risk funds, such as emerging market ETFs).

The best performing ETFs offer lower fees and freedom from excess taxes

Unlike many mutual funds, ETFs don’t load you up with heavy management fees, nor do they tie you down with heavy redemption charges if you decide to get out early. Instead, they give you a lower-cost and more flexible, convenient alternative to mutual funds.

The best ETFs represent a low-cost, tax-efficient way for investors to make money in the long term. Investors get the broad market exposure of a traditional mutual fund, plus the ability to trade at will with nominal fees.

The MERs (Management Expense Ratios) are generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and the performance of a particular stock-market index.

ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

Diversification among the best performing ETFs

Whatever the size of your portfolio, be sure to spread your investments across the main economic sectors. That way, you avoid loading up on stocks that are about to slump simply because of industry conditions or changes in investor fashion. By diversifying across the sectors, you also increase your chances of stumbling upon a market superstar — a stock that does two to three or more times better than the market average. These stocks come along every year. By nature, their appearance is unpredictable; if you could routinely spot them ahead of time, you’d quickly acquire a large proportion of all the money in the world, and nobody ever does that.

For proper portfolio diversification, investors should aim to invest in the five main economic sectors: Finance, Consumer Goods & Services, Resources & Commodities, Manufacturing & Industry, and Utilities.

Avoid investing in “new” ETFs because they come with higher expenses

Some new ETFs use a conventional stock-market index as a base, but add their own refinements. These refinements are tailored to current investor preferences or prejudices. That’s distinctly different from the traditional ETF, which simply aims to mimic an index. These newer, theme varieties may attract attention—and sales—but they frequently carry higher MERs.

In some cases, the new ETF may provide investment benefits but not consistently. In fact, it may hurt results in the long run. The worst cases are bad enough to turn investor profits into losses. One sure result is that the higher MERs will cut into the value of your ETF portfolio every year.

Another drawback to the newer ETFs is that it makes it easier for investors to act on an urge to invest in a specific stock or stock group without doing any messy and time-consuming research to test the longer-term value of the investment.

What are examples of the best performing ETFs you’ve held or watched?

Have you lost money by investing in a new ETF? At what point did you decide it was time to get out?