ETFs for Investors Who Buy and Hold / The basics are the best picks for long-term investors

ANDREA COOMBES for the Wall St Journal writes: Investors are gaining access to a growing number of exchange-traded funds, but financial planners don't always agree about whether that's good news for buy-and-hold investors. Many advisers say the profusion of narrowly focused ETFs runs counter to one of the central ideas of conservative investing: building a simple diversified portfolio with funds that each cover a broad market swath. "The slicing and dicing that is happening in the ETF arena is totally getting out of hand," says George Papadopoulos, a fee-only financial planner in Novi, Mich. He notes that there's an agriculture ETF focused solely on corn futures. These types of funds, Mr. Papadopoulos says, "are not diversified enough, and they are enticing consumers to play the market." Dan Goldie, president of Dan Goldie Financial Services LLC, in Menlo Park, Calif., says investors should favor ETFs with "hundreds or thousands of stocks, not narrowed down to just technology or just financials or just gold." 

For example, he says, that might be an ETF that offers exposure to small-cap stocks by tracking the Russell 2000 index. Still, some advisers say there are plenty of ETFs, including newer ones, that are good building blocks for buy-and-holders. The characteristics to look for, they say, should be the same ones used to shop for index mutual funds: products with broad coverage and low cost. BlackRock Inc.'s BLK -0.53% iShares unit in October launched what it calls its Core portfolio: a collection of 10 ETFs—four new and six existing products—aimed squarely at people who are investing for the long haul rather than trading frequently. The offering represents additional low-cost options in the broad-based ETF space—including one ETF tracking the total U.S. stock market and another for the total international stock realm—not unlike products offered by Vanguard Group, Charles Schwab Corp. SCHW +0.10% and other providers. Jim Wiandt, founder and chief executive of IndexUniverse LLC, says he likes the new iShares Core MSCI Emerging Markets ETF, IEMG -1.00% because it offers individual investors greater access to small-cap companies. The new fund tracks the MSCI Emerging Markets Investable Market Index, composed of about 2,600 companies—substantially more than iShares MSCI Emerging Markets, EEM -1.06% launched a decade earlier. That fund tracks the MSCI Emerging Markets Index, with about 820 companies. The new product also has a lower expense ratio: 0.18% compared with 0.69% for the iShares MSCI Emerging Markets ETF. "I like the small-cap exposure—that's interesting," Mr. Wiandt says, adding that more choice for investors is "a good thing." But do buy-and-hold investors need ETFs at all? Mr. Goldie says: Not so much. Rick Ferri, founder of Portfolio Solutions LLC, an investment-management company in Troy, Mich., agrees, noting there are risks to watch for. ETFs may offer tax benefits and some have lower costs than traditional index funds, Mr. Ferri says, but "there's a learning curve" for investors who aren't used to them. For instance, he says, a buy-and-hold investor putting in an order to rebalance a portfolio of ETFs "could get caught in a lot of things," including volatile intraday trading. During the flash crash in May 2010, for example, the Dow Jones Industrial Average fell about 1,000 points before quickly rebounding. 

Plus there are times when the prices of ETFs veer away from the value of the underlying holdings, which can eat into or add to an investor's return. By contrast, with a traditional index mutual fund, "you're always buying at the net asset value," Mr. Goldie notes. For buy-and-hold investors who are confident they can navigate the world of ETF trading, the choice between such products and traditional index funds may come down, simply, to the type of investment vehicle. If your money is in a 401(k), you're less likely to have access to ETFs. If you're investing through a brokerage firm that offers commission-free trades on some ETFs, your cheapest option may be ETFs. But even comparing costs can get complicated: A commission-free ETF may cost more, over time, than a similar fund that requires paying a commission but has a lower expense ratio, notes Joel Dickson, senior investment strategist at Vanguard Group.