ETF or exchange-traded fund is a security that tracks index, commodity, bond or a mixed basket of an index fund. It is traded like a common stock. They experience price changes daily, and it is more liquid and has lower fees than mutual funds. This does not have its net asset value calculated.

An ETF has many underlying assets: stock bonds, oil futures, gold bars foreign currency, and so on. It divides the ownership of the assets into shares. The ownership of the fund can be easily bought, sold, or transferred in much the same way as shares. The benefit of an ETF is that it can help you build a portfolio, is diversified, and is modeled after a specific index.

Building an ETF portfolio
Look at your objective, return and risk expectations, time limit, distribution needs, tax and legal situations, personal situation, and overall investment strategy to determine asset allocation.

Implement your strategy
Analyze the available funds and determine which ones are the best purchase over a period of three to six months. Once a year, assess your portfolio according to your financial scenario.

Determine the right allocation
Consider the following while making the portfolio allocations:

• Purpose of the portfolio – retirement/college tuition
• Your risk/return objectives?
• Time horizon – the longer it is, the more risk you can take.
• Distribution needs of the portfolio depending on your income needs; you may have to add fixed-income ETFs and equity ETFs that pay higher dividends.

The three-factor model indicates the following:

• Market risk explains the part of a stock’s return. (This indicates that equities should outperform bonds over time because equities have more market risk than bonds).
• Value stocks outperform growth stocks over time because they are inherently riskier.
• Small cap stocks outperform large-cap stocks over time because they have more undiversifiable risk than their large-cap counterparts.
• Therefore, investors with a higher risk tolerance can and should allocate a significant portion of their portfolios to a smaller cap, value-oriented equities.

Listed below are the some of the popular and top 10 ETF funds that one can invest in today:

• VanEck Vectors Oil Services: Relief from regulations and recent curbs in oil production by OPEC and non-OPEC members alike shows a positive backdrop for the energy sector. The oil service and drilling sector look attractive for investment. Drilling activity has picked up and large oil service companies are likely to regain pricing power. VanEck Vectors Oil Services provides diversified exposure to oil service investment.
• iShares National Muni Bond: Municipal bonds have a very low default rate. The iShares National Muni Bond is a $7 billion municipal bond ETF. It has low expense at 0.25% annually and a current 2% dividend. Its bond rating is AA and has an average maturity of 5 ½ years, less than most ETFs.
• PowerShares Dynamic Semiconductors: There is a tidal wave of uses for semiconductors from self-driving cars, home security, trucks, climate control, robots, and data processing; semiconductors used in coffee machines, refrigerator are commodities at the moment. These PowerShares Dynamic Semiconductors provides diversified exposure to the industry with 30 stocks. Managers shift the composition of the portfolio from time to time.
• iShares U.S. Aerospace & Defense, SPDR S&P Aerospace & Defense, and PowerShares Aerospace & Defense: Boeing, Lockheed Martin, Northrop Grumman, General Dynamics, and Huntington Ingalls Industries, all together generate $125 billion sales in the U.S. With $600 billion in spending, the U.S.A accounts for one-third of $1.6 trillion global defense spending. These are the three major ETFs in the U.S. Aerospace and Defense industry. On an annual basis, the three funds are up on average. The risk in holding these ETFs is global defense spending cuts and a negative impact of currency fluctuations. Nearly a third of revenues come from outside the U.S.
• Market Vectors Gold Miners and iShares Barclays 20+ Year Treasury Bond (2 funds): iShares Barclays 20+ Year Treasury Bond has corrected sharply in recent weeks and could provide close to 40% in total return and are some of the most attractive options in the top 10 ETF funds. Both gold and the miners look attractive. Once investors-recognized global imbalances remain and the dollar begins to sell off, we will see gold and the miners rise above the 2016 highs. Market Vectors Gold Miners ETF will be among the better performing ETFs in the first half of 2017.
• SPDR S&P Regional Banking: Financials and regional banks will benefit from a rising interest rate. An increase in interest rate leads to rising net interest margins for banks, which in turn will help propel earnings growth.
• Vanguard: The Vanguard bundle has three ETFs covering a lot of territories. With 60% / 40% in bonds, it has exposure to every corner of the stock and bond markets. 90% of a portfolio is determined by allocation. The best part of these ETFs is that you can select an ETF for each sector where you want exposure. Once you know the basic of ETFs, select your products that meet your needs and have the most favorable expense ratio. The best part is that the American Stock Exchange has more than 200 listed ETFs and the largest number of ETF managers.