But we've noticed something about the JPMorgan U.S. Quality Factor (JQUA) fund, a member of the Kiplinger ETF 20, our favorite cheap ETFs you can buy. The exchange-traded fund has kept pace with the S&P 500 index over most time frames, and it has been a smidge less volatile. Over the past five years, the fund's 13.3% annualized return eked past the 13.2% gain in iShares Core S&P 500 (SPY), an S&P 500 index ETF, with less volatility.

What's the difference between the two funds? The iShares ETF holds all of the large-company stocks in the S&P 500, which are picked by a committee at S&P Dow Jones Indices. The selection process favors companies that meet certain criteria, such as company size, positive earnings and a sufficient percentage of shares available for public trading. 

But JPMorgan U.S. Quality Factor ETF holds just 250-odd stocks and starts with a broader index, the Russell 1000, which means more midsize firms are in the mix. Companies in the Quality Factor fund have an average market value of $112 billion, according to financial data firm Morningstar. (By contrast, stocks in the Core S&P 500 ETF have an average market value more than double that, $278 billion.) 

Finally, companies in the Quality Factor ETF must pass muster for a variety of profitability criteria (such as return on equity), solvency (such as cash flow relative to debt) and earnings quality (such as the ratio of a firm's balance sheet to its average total assets over the past year). 

Despite their differences, the two funds share similar top-10 holdings, including some of the usual suspects: Meta Platforms (META), Alphabet (GOOGL), Nvidia (NVDA) and Microsoft (MSFT). But about one-third of the holdings in U.S. Quality Factor ETF aren't in the S&P 500 index. Some of those stocks, including home goods retailer Williams-Sonoma (WSM) and cybersecurity software maker CrowdStrike Holdings (CRWD), have more than doubled in price over the past 12 months. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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And they’re growing in popularity. The first defined-outcome ETF launched in 2018. Today, there are nearly 270 funds, with $47 billion in aggregate assets. 

Interest in these ETFs ramped up after both stocks and bonds turned in terrible returns in 2022, and investors sought ways to build some defense into their portfolios. But buffered ETFs also appeal to risk-averse investors who want to keep a toe in the stock market. 

Word is, recent and soon-to-be retirees, who are staring down a possible 30-year stretch for their money to last, are interested. “You can’t maintain your standard of living for that long without earning equity-like returns,” says Matt Collins, head of ETFs at PGIM Investments. “Some are willing to take some risk to get that exposure, but not a lot. And if you can offer them a narrower range of outcomes, it gets them a little closer to being comfortable with exposure to large-company U.S. stocks.” 

Buffered strategies aren’t new. These approaches have existed for years in mutual funds and in annuities and other products sold by insurance companies. But the ETF versions are accessible to all investors. Innovator and First Trust were the first firms to offer buffered ETFs;  AllianzIM, Pacer and TrueShares entered the market in 2020 and 2021. More-recent joiners include iShares, PGIM Investments and Fidelity. 

Trouble is that these actively managed strategies require a lot of explaining. They’re not typical stock or bond funds. In fact, they’re something in between, more like alternative investments. “Investors need to reach a level of understanding to make sure they have the right expectations,” says Ryan Issakainen, First Trust’s ETF strategist. That’s part of the reason the bulk of defined-outcome ETF buyers these days are financial advisers who purchase them on behalf of their clients, not individual investors. And that might be a good thing.

Buffered ETFs come in a variety of risk-reward combinations. The majority offer a certain cushion on losses over a 12-month stretch in exchange for a give-back on gains. But others tweak the formula: Some allow you to capture more of the stock market’s gains; others focus on downside protection. ETFs that let you hedge against stock losses and guarantee a payout — sort of like a dividend — have just joined the mix, but we’ll address them at some other point (stay tuned). 

“There’s a super-wide array of ways to use these products,” says Graham Day, chief investment officer at Innovator ETFs. “They can be used as a complement to a stock portfolio, other times as bond alternatives, or other times as an alternative-investment sleeve” that zigs when other parts of your portfolio zag.

Over the next few paragraphs, we’ll explain how these funds typically work, walk you through the broad types of strategies available, and discuss their pros and cons. We’ve focused on ETFs for stock investors here. Returns and data are through April 30. 

How do ETFs work?

Most buffered ETFs are linked to the S&P 500 index. The fund managers define how much protection to offer on the downside (the buffer) and set the limit on upside returns (the cap) by investing in options contracts, which allow them to buy or sell shares in an S&P 500 ETF at a set price on or before a certain date. 

The most common type of buffered ETF has a 12-month outcome period. The range of returns possible over the period is defined by the options contracts the fund holds. At the end of the one-year period, the ETF rebalances by buying new options to ensure the promised buffer, which in turn resets the cap for the next 12-month period. 

Typically, the downside protection is fixed, depending on the strategy, but usually ranges between 10% and 20%. How much you give up in upside gains depends in part on the amount of protection the fund offers. The bigger the down-market cushion, the smaller the potential gain. Market volatility and interest rates affect how high or low the cap on gains will be, too. 

Let’s walk through an example. Innovator S&P 500 Buffer ETF April (symbol BAPR) aims to track the SPDR S&P 500 ETF Trust (SPY). 

Investors who bought shares in BAPR at the start of April 2024 have a 9% buffer against losses. That means if SPY drops anywhere up to 9% over the 12-month period ending in March 2025, shareholders lose nothing. But losses beyond 9% are not protected. If SPY declines, say, 15% by the end of the 12-month period ending in March 2025, shareholders who bought BAPR in early April 2024 will suffer a 6% loss. 

On the flip side, the potential 12-month return of the Innovator S&P 500 Buffer April ETF tops out at 18.3%. Any gains beyond that are forfeited. “These products do exactly what they say they’re going to do,” says Innovator’s Day. “That level of predictability — knowing what you’re going to get — is enormously powerful.” For the period that just expired in March, investors for the full year gained 19.3%; the S&P 500, by contrast, returned 29.9%. 

The pitfalls of buffered ETFs

Naturally, these strategies come with some caveats. Cost is one. Buffered ETFs charge an average expense ratio of 0.77%. That’s more than the typical 0.59% fee for actively managed diversified U.S. stock ETFs. 

You need to time your purchase, too. It’s best to buy these funds within a week of the start of its 12-month stretch, just when the fund rebalances. In late June or early July, for instance, you’d buy a July-dated buffered ETF. 

And plan to hold the ETF for at least the full year. For investors who don’t buy at the start of the outcome period, the buffer and cap will shift depending on the broad market’s moves and the fund’s net asset value each day. It’s why you see these strategies issued in monthly varieties: Fund firms want to give investors buy-in options through-out the year. That said, these funds aren’t time deposits. You can get out at any point. 

Finally, the buffer and the cap on any given ETF apply to its full outcome period. The outcome period of the April series of Innovator S&P 500 Buffer ETF is April 1, 2024, to March 31, 2025. If you’re buying and holding the fund, what happens in the interim is immaterial. All that matters is where the market stands at the end of the outcome period. 

That’s what makes an investment in buffered ETFs more akin to a one-year bond you hold to maturity. “What we say we will deliver in a January defined-outcome ETF won’t happen until December 31 — 12 months later,” says PGIM’s Collins. “And it’s a slow grind.”

At the end of the 12-month period, when the fund rebalances by buying a new set of options, you may want to consider what to do next with the money in the fund. You can always do nothing. In that case, your assets will remain in the fund and automatically roll over to the next year-long period. But it’s a good idea to review the new outcome parameters for the coming year. “That ongoing monitoring of the caps from year to year is something you have to stay on top of,” says Collins.  

There are a variety of ETF options to choose from

The S&P 500 isn’t the only index to get the buffered treatment. Innovator and First Trust offer defined-outcome ETFs tied to the Nasdaq index, the MSCI EAFE (which tracks foreign stocks in developed countries), the MSCI Emerging Markets index and the Russell 2000 (a benchmark of small-company stocks). Generally, those ETFs work in the same way as the 12-month defined-outcome funds that track the S&P 500. 

But other twists of the defined-outcome formula are worth highlighting: 

More upside. Some funds don’t come with caps on potential returns, which may appeal to investors more interested in growth than downside protection. For example, instead of accepting a percentage-point limit on potential returns, investors in TrueShares Structured Outcome ETFs can expect to reap roughly 75% to 80% of the S&P 500’s price returns over any given 12-month period — no matter how high the index climbs. 

For example, the TrueShares Structured Outcome January ETF (JANZ), which has a 12-month outcome period that starts in early January, returned 18.9% in 2023, or 78% of the S&P 500’s 24.2% price return. “Over the long run, what you miss on the upside is as equally damaging to a portfolio as a drawdown,” says Michael Loukas, chief executive of TrueMark Investments, the firm behind TrueShares ETFs. The TrueShares Structured Outcome ETFs aim to offer downside protection of 10%. 

Industry insiders call these strategies “uncapped” defined-outcome ETFs. In the uncapped version from AllianzIM, investors give back the first three percentage points of gains but pocket any advances beyond that. So if the broad market climbs 4%, you earn 1%, but if the market rockets 50%, you make 47%. The firm’s first uncapped defined-outcome ETF, AllianzIM U.S. Equity Buffer 15 Uncapped Appreciation (ARLU), launched in March and offers a 15% buffer on losses.

A bigger cushion. Almost all buffered ETFs offer some downside protection, but most won’t fully protect against severe bear markets. There are exceptions, but they’re relatively new, so they have little track record. 

Among the exceptions is a group of funds from Innovator called Equity Defined Protection ETFs. They aim to offer 100% protection against losses, before fees and expenses, for two years. The price for that protection, of course, is a lower potential return. The oldest of these funds, Innovator Equity Defined Protection ETF 2 Year to July (TJUL), launched in July 2023, and the maximum return that investors can expect over the two-year period is 16.6%, cumulative, before fees. 

AllianzIM shrinks the outcome period, which can work to your favor in up markets. For example, AllianzIM U.S. Large Cap 6 Month Floor5 April/October (FLAO) limits losses to no more than 5%, but it rebalances every six months. There’s still a cap on gains. For investors who bought the April/October fund when it reset in early April, the gains are capped at 8.81%. AllianzIM’s two uncapped funds launched this year, so they have almost no track record. We’ll keep our eye on them.

An all-in-one. Some firms roll a series of monthly defined-outcome ETFs into one fund. But the end result is a less predictable outcome. “The fund of funds ETF doesn’t offer a defined outcome, but the underlying holdings do,” says First Trust’s Issakainen. “You end up with something a little different, but ultimately the ETF is less volatile than the overall market, and that’s what it’s supposed to be.”

First Trust’s FT Vest Fund of Buffer ETFs (BUFR), for instance, holds 12 defined-outcome ETFs — spanning 12-month holding periods starting in January through December — in equal stakes. All of the underlying funds offer a 10% buffer against losses in the S&P 500. The caps on gains range between 15.7% and 18.9%. 

Pacer Swan SOS Fund of Funds ETF (PSFF) takes a more active approach, opportunistically buying and selling monthly funds depending on market conditions. “If the market goes up a lot, the managers might sell a monthly series to move to a new series and increase their cap and bring the buffer up,” says Sean O’Hara, president of Pacer ETFs. 

Our verdict: These funds are solid low-volatility stock strategies. In 2022, when the S&P 500 lost 18.1%, the First Trust fund of buffer ETFs lost 7.7%; the Pacer fund, just 4.0%. But if predictable outcomes are what you seek, a fund of funds may not be the best option. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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ETFs are designed to track various industries or investment strategies and can contain a variety of investments, including stocks, bonds, cash equivalents or commodities. They’re a popular alternative to mutual funds, despite the similarities between the two investment vehicles.

ETF vs mutual fund: What’s the difference?

At the base level, ETFs and mutual funds act in much the same way. Both are designed to allow an investor to benefit from ownership in multiple securities as part of a single investment. So, instead of owning shares of one company or stock, the investor buys shares of a fund that is made up of a basket of different investments. Owning a diverse set of investments minimizes your risk of being overexposed to a specific stock or bond. Both ETFs and mutual funds are also highly liquid, meaning you can generally buy and sell them easily.

While the first exchange-traded fund launched 30 years ago, traditionally most strategies focused on investing in passive baskets that tracked a broad-based index. Active ETFs were slower to develop. An important ruling from the SEC in 2019 helped revive interest in active ETFs. The SEC's updated regulations allowed for actively managed ETFs to create custom portfolios that had the potential to outperform the market like open-ended mutual funds. Perhaps most importantly, the new rules offered a more straightforward path for ETFs to be approved by regulators, making it simpler to create and launch ETF products.

Some pros of owning ETFs

There are many potential benefits to investing in ETFs. Unlike mutual funds, which are available for trading only at the end of each market day, ETFs allow investors to react to market activity by buying or selling shares in real time. In addition to intraday trading, ETFs are increasingly attractive to investors because they are:

Transparent: Holdings of an ETF are disclosed in real time, which allows investors to make more educated decisions about their potential performance. Many mutual funds only disclose holdings on a monthly or quarterly basis.

Tax efficient: Capital gains-triggering events in an ETF are generally limited to when the investment is liquidated — as opposed to a mutual fund, which passes on the cost of trading the underlying investments in the fund in taxable earnings.

Cost effective: ETFs generally have lower fees relative to mutual funds due to their structure.

As a result, active ETFs have experienced meteoric growth in the U.S. and now account for more than $8 trillion in assets under management (AUM). Since active ETFs first launched, they’ve been growing rapidly in popularity — both from a fund launch and fund flows perspective. Since 2021, over 60% of ETF launches have been active. Active ETF flows continue to meaningfully outpace overall ETF flows on a percentage-of-AUM basis.

Some potential cons that come with ETFs

Despite their advantages, there are also considerations when exploring ETF investing. While ETFs offer the flexibility to trade intraday, they can be subject to disadvantageous spreads — the difference in the price to buy and sell a share of the fund. That’s different from a mutual fund, which will always trade according to the net asset value of the shares being traded.

Additionally, some ETFs can be difficult to trade, depending on the underlying investments in the fund and any existing market activity.

Ultimately, investing in an ETF doesn’t mean you need to leave mutual funds behind. You can use both as effective alternatives to direct investing in individual stocks or bonds, and both can have a place in a successful portfolio.

Whether investing in mutual funds or ETFs, often the most favorable outcomes result from combining active and passive investment strategies in your portfolios. That’s because active strategies have tended to benefit investors more in certain investing climates, and passive strategies have tended to outperform in others. A financial adviser can help determine a proper investment allocation and selection for your goals.

Price for performance

There can be no debating that actively managed ETFs are a growing force in the investment space — particularly in the post-pandemic time period. As stock market growth slowed during the pandemic, many investors chose to shift to the versatile intraday trading style of an ETF. Additionally, the opportunity to have an investment manager prepared to react to market volatility and inflation stresses of the last few years has contributed to the spike in ownership of active ETFs.

Whether you choose an active or passively managed ETF, or even whether to invest in an ETF at all, will depend on your overall investment goals:

Passive ETFs will invest according to the index or commodity they are designed to track, making for more predictable returns.

Active ETFs will likely provide a better opportunity to outperform the market as the fund manager makes adjustments based on market activity. But you’ll have to pay for that potential in the form of higher management fees.

ETFs are growing in popularity and offer convenience and the potential to outperform the market. If an ETF fits your individual investment strategy, having a conversation with your financial adviser can help determine whether your risk tolerance, appetite for fees and performance goals can be best achieved through a passive or actively managed fund.

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Earlier this year, that appeared to be going in reverse after Fidelity Investments announced plans to introduce a $100 "surcharge" on certain ETF trades. It wasn't, strictly speaking, a trading commission, but for all intents and purposes, it might have been considered one. 

Investors likely wouldn't have noticed a difference, as the charge was going to being levied on only nine ETF issuers, none of which are in the top 50 by market share. These are smaller, more obscure ETFs that you probably weren't likely to buy anyway. The ETF issuers affected were Adaptive, AXS Investments, Cambiar, Day Hagan, Rayliant, Regents Park, Running Oak, Simplify Asset Management and Sterling Capital.

However, Fidelity has since reached agreements with these issuers and dozens of other providers of exchange-traded funds. The firm is also in constructive dialogue with many others. As a result, no service fees will be incurred at this time.

As a Fidelity spokesperson told Kiplinger, "Fidelity remains committed to providing clients choice through an open architecture investment platform. The arrangements we have with asset managers help us uphold the platform and the exceptional value it provides for all products, including customer service, research tools, technology capabilities, and security measures to drive a positive experience for investors."

Fidelity adds that the "decision to harmonize some of our fee policies comes as our level of support and service for ETFs across the industry is growing rapidly. We continue to work closely with asset managers, as we've always done, to engage in constructive dialogue and reach outcomes that reflect a more consistent approach across mutual funds and ETFs. Fidelity provides transparency to investors for commissions, margin rates, and fees at Fidelity.com."

Still there are implications here for investors, and the incident reveals a lot about the "pay to play" incentive structure of the brokerage industry. 

Let's dig deeper.

 Why would Fidelity consider a surcharge?  

Mutual funds have always paid for the privilege of being available on brokerage platforms. Whether by sales loads or 12b-1 fees, mutual funds have traditionally incentivized brokerage firms to carry their offering and individual stock brokers and advisers to sell them. 

A sales load is a commission that comes off the top of an investment. For example, if a mutual fund charges a 5% load, you're really only investing 95 cents on the dollar, with the other 5% going into the broker's pocket. Loaded mutual funds have really fallen out of favor. Recent research from the Investment Company Institute found that 92% of mutual fund sales by dollars invested went into no-load funds. 

Another industry trick is the 12b-1 fee. This is, in effect, a trailer the broker gets for every year the client continues to hold the fund. In theory, this incentivizes the broker to hold on to the fund instead of churning the account in pursuit of new commissions. But it's still money flowing out of the pocket of the investor and into the pocket of the broker. 

ETFs have long been touted as cheaper alternatives to traditional mutual funds, and for the most part this is true. There are no loads for ETFs, as they trade like stocks and thus enjoy free or nearly free trading commissions at most brokerage houses. And because ETFs are often index funds and have very limited trading expenses, they can' charge very low internal expenses. The expense ratio on the popular iShares Core S&P 500 ETF (IVV) is just 0.03%, for example, meaning that for every $1,000 you invest, you lose just 30 cents in fees per year. 

And here's where pay to play comes into effect. 

Despite the fact that ETFs trade on stock exchanges just like stocks, some brokers have "maintenance arrangements in place" in which the ETF managers share a portion of their management fees with the broker for the privilege of having the ETFs available at the broker. In the case of Fidelity, the company is asking for 15% of the fees collected by the managers. For the ETF managers that didn't take the deal, any service fee would be limited to 5% of a buy, up to $100.

 What does this mean for investors? 

It seems that no matter how many fiduciary rules the regulators put in place, there are always going to be incentives for brokers and managers to act against the interests of their investors. Management fees on mutual funds and ETFs have really come down over the past few decades to the point that a large ETF like IVV can charge just 0.03% and still turn a profit for the manager. 

But if fees are the start of a new trend in the industry, then it's likely that the overall cost to clients could rise. If the ETF managers have to pay the broker a cut, they will have less revenue to cover their costs and pay their staff. As a practical matter, that likely means they'll need to charge higher fees.

Another unintended consequence is that fees could strengthen the large, existing players in the industry and penalize smaller upstarts. This would potentially reduce the available options to the investor and reduce competition.

In the bigger picture, the takeaway may be that the great, multi-decade trend toward lower and lower fees to investors could hit the end of the line at some point in the near future. This doesn't mean we'll be going back to the pre-1974 days of ridiculously expensive fixed commissions, of course. But at the margin, it does mean a little less money in investors' pockets. 

Editor's Note: This article initially stated that based on a hypothetical $100 service fee, "you could buy a single share of an ETF for $50 and then pay a 200% commission on that purchase in the form of the $100 surcharge" and that ETFs of issuers who did not reach an agreement with Fidelity would be "subject to a $100 surcharge." This is not accurate. Any service fee would be limited to 5% of a buy, up to $100. This article has also been updated to reflect that Fidelity has reached agreements with these issuers and dozens of other ETF providers.

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Over the past 12 months through the end of March, actively managed ETFs have garnered $157 billion, or 22% of all net ETF inflows (the sum of money deposited minus money that's withdrawn). A decade ago, active ETF strategies claimed just 2% of all net inflows, says Aniket Ullal, head of ETF data and analytics for investment research firm CFRA Research, with the bulk of assets going into far more popular index-tracking ETFs.

The embrace of active ETFs is reflected in a surge of both demand and supply. Many advisers now prefer ETFs to mutual funds because ETFs tend to be more tax efficient. And advisers want access to ETFs that employ the same active mutual fund strategies they use in client portfolios. Mutual fund firms are now meeting those demands. 

"After many years of ETFs pulling in more money than mutual funds, the big fund companies have had to enter the ETF space," says Ullal. 

That partly explains the accelerated pace of new active ETF launches: Of the 327 actively managed diversified stock ETFs in the U.S. today, almost half were launched over the past two years. 

We took a closer look at the offerings in U.S. diversified stock funds to find the best new active ETFs available today. The funds we highlight below are diversified; none are sector funds or so-called thematic funds that invest in a particular trend, such as clean energy or artificial intelligence. All returns and data are through March 31. 

Avantis

The folks at Avantis have a specific definition of value. "We want good prices but also good profits. We target that intersection," says Phil McInnis, the firm's chief investment strategist. Profitability and a low price, he adds, are "good proxies" for expected return rates. 

So far, so good. Since its September 2021 launch, the Avantis U.S. Large Cap Value ETF (AVLV) has returned 12.5% annualized, outpacing the S&P 500 index and the lion's share of the ETF's peers (funds that focus on bargain-priced large-company stocks). Top holdings in the large-cap value fund, which charges a 0.15% expense ratio, include Meta Platforms (META), JPMorgan Chase (JPM) and Costco Wholesale (COST). 

Despite the big run-up in Meta shares, the stock "still ranks high on value and profitability. It doesn't get the highest ranking on those measures, but it's a big company and we factor in market cap to determine weight in the portfolio," says McInnis. 

Avantis U.S. Small Cap Value ETF (AVUV) launched in September 2019 and has a longer track record that's equally bright. The small-company value fund, which charges a 0.25% annual expense ratio, has returned 11.0% annualized over the past three years. That's better than 91% of its peers (funds that focus on small, value-priced companies). It also beat the 0.1% annualized loss in the Russell 2000, an index of small-cap stocks. 

At last report, the top three stocks in the fund were wood-products and materials maker Boise Cascade (BCC), retailer Abercrombie & Fitch (ANF) and SM Energy (SM).

Capital Group

Capital Group is the firm behind the well-regarded American Funds suite of mutual funds, which have been sold mostly through advisers. With the 2022 launch of active ETFs, however, the firm's strategies are now available to any investor. 

Like the mutual funds, the ETFs are managed in the Capital System way – in which multiple managers divide a fund's assets and run each sleeve independently. But the Capital Group ETFs are not clones of existing American Funds products. 

The Capital Group Core Equity ETF (CGUS) aims for long-term growth of capital and income. The fund's six managers can invest in companies of any size, but the portfolio holds mostly large-company stocks, a mix of fast growers and blue chip dividend payers. Microsoft (MSFT), Amazon.com (AMZN), Broadcom (AVGO) and GE Aerospace (GE) are among the fund's top five holdings. 

"The goal is to offer a smoother ride for investors," says Zahid Nakhooda, an ETF specialist with Capital Group. Since its inception in February 2022, Core Equity has returned 13.3% annualized, better than the 11.8% average annual gain in the S&P 500. Its expense ratio is 0.33%.

The Capital Group Growth ETF (CGGR) and the Capital Group Dividend Value ETF (CGDV) are often paired together in a portfolio, says Nakhooda. Over the past two years, a 50-50 combination of the Growth and Dividend Value ETFs has returned 12.2% annualized, beating the S&P 500 by an average of nearly three percentage points per year. 

The Growth fund holds, not surprisingly, some of the market's best performers of late, including Meta Platforms and Netflix (NFLX), but Regeneron Pharmaceuticals (REGN), Visa (V) and Intuitive Surgical (ISRG) are also among the top 10 holdings. 

Top holdings at Dividend Value include Microsoft, British American Tobacco (BTI), Carrier Global (CARR) and Broadcom. The Growth ETF has a 0.39% expense ratio; Dividend Value, 0.33%.

Fidelity

The Fidelity Enhanced Large Cap Core ETF (FELC) is designed to serve as a core holding in a portfolio – much like an index fund. But it aims to beat its underlying benchmark, the S&P 500, with less risk by using a proprietary quantitative model. Over the past three and five years, Fidelity Enhanced Large Cap Core has beaten its benchmark on an annualized-return basis, with less volatility. The fund charges a 0.18% expense ratio.

Computers drive the stock picking, employing machine learning and natural language processing, for instance, but it isn't a "black box," says Mike Hagopian, a portfolio specialist who works closely with the firm's Enhanced suite of funds. The model focuses on the usual fundamental stock measures, such as valuation, growth and quality, but it also homes in on atypical measures, such as spending on research and development, intellectual property assets and what current activity in the options market says about a particular company's shares.  

The aim is to find reasonably priced shares in a company with strong prospects, growing earnings and a stock price with upward momentum, all relative to peers. 

"There isn't a singular characteristic or factor that defines our favorites," says Hagopian, "but we look at the overall picture." 

Putnam Investments

Only 44 stocks fill the Putnam Focused Large Cap Value ETF's (PVAL) portfolio, and that's by design. "We want to own the best stocks within each sector," says Lauren DeMore, who comanages the fund with Darren Jaroch. They favor companies with strong cash flows and the ability generate and increase dividends for investors, but DeMore is quick to add that there isn't "one sound bite or even a few bullet points" that characterize stocks in the portfolio. 

The managers recently added to their stake in Citigroup (C). Shares in the financial services company typically trade at a discount relative to peers because historically it has underperformed. But Citi chief Jane Fraser is working to improve the company's profitability, in part by reducing expenses. "That's what we're playing for," says DeMore. 

The fund's secret sauce is the managers' "maniacal attention" to risk, says DeMore. They take their time building the portfolio. "We own stocks for an average of five years, and it takes us about an average of six months to become comfortable adding a new name to the fund," says DeMore. Insurance giant American International Group (AIG), Exxon Mobil (XOM), and investment firm Apollo Asset Management (APO) were top holdings at last report. 

The ETF opened in May 2021, though it's worth mentioning that the managers have been running the strategy as a separately managed account since 2016. Since the ETF launched, its 14.5% annualized return has beaten the 10% gain in the S&P 500. 

"We aim to be consistently good, not occasionally great," says DeMore. The ETF charges 0.56% in expenses.

Mutual fund lookalikes

It isn't unusual these days to find an exchange-traded fund version of a standout active mutual fund strategy. In fact, two members of the Kiplinger 25, the list of our favorite no-load mutual funds – the Fidelity Blue Chip Growth and T. Rowe Price Dividend Growth – are also available as ETFs, run by the same skilled managers. Their ticker symbols are FBCG and TDVG, respectively.

But the ETFs aren't exact clones of the mutual funds. They can't be, in part, because the mutual funds have greater latitude to invest in certain securities than the ETFs, such as stakes in companies that haven't gone public yet. For ex­ample, Fidelity's Sonu Kalra, who runs the Blue Chip Growth mutual fund and ETF, owns a stake in the private company Space Exploration Technologies, better known as Elon Musk's SpaceX, in the mutual fund but not in the ETF. 

But ETF replicas are worth con­sidering. The ETFs boast slightly lower expense ratios, for a start, compared with their mutual fund counterparts. Plus, there's no minimum to buy ETF shares at most brokerage firms. (Fidelity has no minimum investment required for its mutual funds, but T. Rowe Price funds have a minimum initial investment of $2,500.) 

Finally, the long(ish)-term returns are similar. Over the past three years, returns for the ETF and mutual fund versions of Fidelity Blue Chip Growth are the same: 9.7% annualized. 

We're carefully watching this trend of good active mutual funds opening ETF siblings. One new offering in particular has caught our eye: The T. Rowe Price Capital Appre­ciation Equity ETF (TCAF). 

The ETF gives you access to the prowess of David Giroux, a star manager whose highly rated stock-and-bond mutual fund, T. Rowe Price Capital Appreciation, is closed to new investors. The ETF holds only stocks – almost 100 securities, which is more than the 40 to 60 names typically found in the balanced mutual fund, says a Price spokeswoman. But both leverage the fundamental, bottom-up invest­ment approach of the firm's exten­sive research team (and Giroux, of course). 

Active ETFs give investors a tax-friendly option

Tax efficiency has been a big draw for ETF investors. The advantage comes from the way ETF shares are created and redeemed. Mutual funds must sometimes sell underlying securities to meet shareholder redemptions. That can trigger a capital gains distribution, which is shared by all fund shareholders. (Mutual funds are required by law to pay out any realized gains to shareholders at least once a year.)

ETFs, on the other hand, don't actually buy and sell the underlying securities in their portfolios. Instead, the ETFs hand over baskets of securities to third parties – institutional investors and market makers called authorized participants – for redemptions when shareholders in the fund sell shares; or the ETFs receive baskets of securities when shareholders buy shares and new shares must be created. 

No cash changes hands between the ETF and the authorized participants during these so-called in-kind transactions, and because of that, the ETF isn't as likely as a mutual fund to make a capital gains distribution. (You're still liable for capital gains taxes when you sell shares.) 

According to an October 2023 study by T. Rowe Price, 47% of mutual funds, on average, distributed capital gains to their shareholders during the five-year period from the start of 2018 through 2022. By contrast, only an average of 7% of ETFs distributed gains.

The author owns a long-term position in Fidelity Blue Chip Growth ETF. Contact her at Nellie.Huang@futurenet.com.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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The January 2024 approval of 11 spot bitcoin ETFs was a watershed moment, presenting investors with a gateway to being able to invest in bitcoin through their traditional investment accounts. We expect this will continue to boost broader investor adoption of bitcoin and attract investors who previously did not want to open a digital wallet or a digital asset custodial account. The approval of 11 products all at once can seem overwhelming, so the following guide can be used as a tool for investors who are interested in adding these types of investments to their portfolio.

Understanding spot bitcoin ETFs

An exchange-traded fund (ETF) is a type of pooled investment security that can be bought and sold much like an individual stock. The main difference between an ETF and a mutual fund is that though a mutual fund is also a pooled investment, it trades only once a day after markets close. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be designed to track specific investment strategies.

A spot bitcoin ETF is a breakthrough financial vehicle that tracks the current price of bitcoin, providing a simplified investment approach without the complications of direct ownership. In contrast to mutual funds that trade once at the end of the day, these ETFs operate similarly to stocks, allowing for real-time trading, adding flexibility to investment strategies.

Spot bitcoin ETFs operate by securing and holding actual bitcoin, stored in secure digital wallets by custodians. These custodians play a crucial role in safeguarding assets, employing sophisticated security measures such as cold storage to mitigate theft risks.

Bitcoin trades 24/7 throughout the world, but remember, the 11 spot products that were approved will trade only when markets are open, even though their underlying investment will be trading all of the time. For example, if you are looking at the spot price on a weekend, you will not see the ETF price changing until markets open the coming week.

A closer look at the approved spot bitcoin ETFs

The selection of SEC-approved spot bitcoin ETFs comes with various expense ratios and fees, tailored to meet different investment profiles. To entice investors, some offer limited-time fee waivers or reductions. Some of those ETFs include:

• ARK 21Shares Bitcoin ETF (ARKB). No fees for six months, until hitting $1 billion in assets.
• Fidelity Wise Origin Bitcoin Trust (FBTC). Fees waived until July 31, 2024.
• Franklin Bitcoin ETF (EZBC). No fees until August 2, 2024, or until reaching $10 billion in assets.
• Invesco Galaxy Bitcoin ETF (BTCO). Zero fees for the first six months, or until $5 billion in assets is accumulated.
• Others, including the Bitwise Bitcoin ETF (BITB) and the Grayscale Bitcoin Trust (GBTC), have opted not to offer fee waivers.

Investors should carefully consider all fees and terms before making investment decisions and do research or talk to a professional before choosing to invest. Since these products are designed to track the performance of spot bitcoin, we recommend not solely focusing on fees to make a decision on which one to buy. If the product is low-cost but doesn’t track very tightly to the performance of bitcoin, then you are incurring a “cost” in addition to the stated fee.

Risk assessment and considerations

Investors must carefully weigh the risks associated with spot bitcoin ETFs, including regulatory uncertainties, custody arrangements, fees and price volatility. This is still an emerging asset class and will likely have big price moves day-to-day that we don’t think can be timed.

If clients express interest in having bitcoin exposure, we will generally recommend about 1% to 2% of the portfolio to start. This allows investors to acclimate to the high volatility. We emphasize that even if bitcoin were to hit zero, with a 1% to 2% portfolio allocation, it would not significantly impact their overall portfolio return in the long run. With an asset that can move in short periods of time +100%, a small allocation will still provide benefits to overall performance of the entire portfolio. A little can go a long way with this type of investment.

If clients want to have the ability to move bitcoin to a wallet, they won’t be able to do that with an ETF. Some investors prefer to be able to control the token vs having it wrapped in an ETF with other investors. Think of it this way: You can buy a gold coin and store it on your own, or you can buy an ETF with gold as its sole holding.

If at any point there are unrealized losses that an investor wants to harvest for tax reasons, they are subject to abiding to the same wash sale rules of securities. If you sell the bitcoin ETF, the way the IRS rules are written, you have to stay out of it for 30 days if you want to book the loss on this transaction. Selling one spot bitcoin ETF and buying another that invests identically is likely going to be a violation of the wash sale rule.

It is unclear at this point how custodians will monitor this on investor 1099s and how it will be enforced. If they own the token directly and harvest it, they can buy it back immediately under current tax rules, which is a notable difference vs using an ETF.

A shift in sentiment

The approval of spot bitcoin ETFs signifies a significant shift in regulatory sentiment toward digital assets. While this marks a milestone, uncertainties remain regarding future approvals and regulatory developments.

As the digital asset landscape continues to evolve, informed decision-making remains paramount for navigating the complexities of this dynamic market. If you have interest in learning more, speak to your financial adviser about your risk tolerance with an investment like this and what place bitcoin may have in your portfolio.

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.

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It turns out you can – at least theoretically – thanks to a statistical measurement known as beta.

What is beta? 

 When you hear "beta" in reference to investing, think "broad" or "benchmark." Beta is a measure of how volatile an investment's price is relative to the broader market or a benchmark such as the S&P 500.

It's measured on a numerical scale where a beta of one indicates the security's price moves in line with the market benchmark. A beta of less than one indicates the security is less volatile than the market benchmark. A beta greater than one suggests it's more volatile than the market benchmark.

So, if you invest in a security with a beta of 1.0, you're getting pure market exposure. "There are no adjustments for market conditions or changes," says Mike Thompson, a chartered financial analyst and co-portfolio manager at Little Harbor Advisors. "You get exactly what the market delivers in good times and bad times."

Sometimes this is all you want. But other times, he says it can be helpful to offset some of that with tactical management.

How to use beta in investing

 You can use beta to help align your portfolio with your risk tolerance, says Tim Urbanowicz, head of research and strategy at Innovator ETFs.

If you know your stomach does somersaults anytime your portfolio's value drops, you may want to invest in more lower beta securities. This tactic will help reduce the downswings but may also mean your portfolio doesn't rise as high during up markets because beta goes both ways. 

A stock with a beta of 0.5 is half as volatile as the broader market. If the market goes down by 10%, the stock should only decline by 5%. But if the market goes up by 10%, the stock should only go up by 5%. Meanwhile, a stock with a beta of 2 will double the broader market's returns, both up and down.

You should be aware of where beta is concentrated in your portfolio, "whether it is spread across the portfolio and how the portfolio aligns," Thompson says.

Final notes on beta

The challenge with using beta in investing is that beta is a historical measure, Urbanowicz says. "Assets that were once low beta may not be low beta moving forward."

Beta is a backward-looking measure. It's "one measurement of risk based on the behavior of the market as a whole or to a benchmark's return stream, but that doesn't mean it's always going to do what's expected," Thompson says.

Beta is also only a measure of market risk. It can help you determine how a stock will react to events that impact the market as a whole. It doesn't tell you anything about the company-specific risks the stock may face, which is one reason you shouldn't rely solely on beta when making investing decisions. 

It's also important to remember that beta is a measure of volatility, and volatility is only one type of risk. Even low-beta stocks can incur large losses – they just shouldn't be as large as those experienced by the market as a whole.

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According to March data from the Internal Revenue Service (IRS), the average refund for 2024 is up moderately over 2023 numbers, to nearly $3,200. 

That's a significant chunk of change – and since that figure is just an average, there will be some Americans who may be getting checks for more than that amount in the coming weeks.

For many households, tax refunds are a much-needed influx of cash to help defray necessary expenses. For others, it's a one-time windfall that may quickly be reallocated to summer vacations – or for the more aggressive folks, investments in volatile assets such as cheap stocks or cryptocurrency.

But if you're thinking about the long haul, you may want to consider investing your tax return in a structural way. Here, we take a look at how to invest your tax return doing just that.

How to invest your tax return: Fund a rainy-day account

Studies have shown that roughly half of Americans have $500 or less in emergency savings. If this sounds familiar, then your first investment should be to protect yourself.

The needs of each family are different and for some, even a few thousand dollars is just a drop in the bucket to cover their expenses. According to the Census Bureau, the median household income in the U.S. is just under $75,000. This means that a family living paycheck to paycheck would need about $6,000 to cover a month's worth of expenses.

Building a financial safety net is crucial if you don't currently have one. Beyond the peace of mind it provides, this low-risk investment in your savings can quickly pay for itself when you consider the high costs of overdraft fees, a poor credit score and other factors.

How to invest your tax return: Pay off high-interest debt

Another structural financial problem for many Americans is high-interest debt, with the average credit card interest rate hovering around 22% right now, according to WalletHub. 

Research shows the stock market generally returns about 10% each year on average, so you'll get more than twice the bang for your buck by simply paying down debt and reducing your monthly payments.

If you're skeptical of that, then consider this math: If you have that 22% interest rate on a $2,000 purchase but can only afford to pay $50 a month on your balance, you'll ultimately end up paying more than $4,000 in full for that item.

Rather than pay double the original purchase price, you can save yourself significant interest payments by paying down the principal value as quickly as possible. Even if your total balance is larger than your return, beating back your debt as much as you can is still a wise investment. 

How to invest your tax return: Open a Roth IRA

If you're more patient, investing your tax return in a Roth IRA may make more sense. You invest after-tax money in these platforms and then can withdraw it free and clear after the age of 59 ½. 

That may sound like a long time,  but you'll need the money come retirement – and gains over the intervening years may ultimately turn your 2024 tax return into a very big chunk of change when it comes time to cash out.

How to invest your tax return: Seek out a financial or tax adviser

Speaking of interest, here's a reality check: Receiving a big tax refund is not necessarily a good thing, since the IRS does not pay you a penny of interest. You're effectively giving Uncle Sam a free loan across the year. 

If you get a particularly large return, then, it may make sense to invest that cash in a professional who can help optimize your tax status going forward and set you up for future success.

Most tax advisers are happy to work for a fee-only model, where they charge you a flat or hourly rate. Even if you don't want to pay for ongoing tax preparation every year, they can generally counsel you on how to optimize your deductions and withholding in the future to keep more of each paycheck in your pocket.

Similarly, fee-only financial advisers accept one-time charges in exchange for advice that will set you up for success. Many understand tax efficiency and can also help assess your general financial planning needs for the long term.

How to invest your tax return: Buy an index fund

It's great news if you're lucky enough to have savings, no debt and a generally sound retirement plan. That means you have the flexibility to invest your tax return and put it to work in index funds.

These products are pooled investments that are incredibly affordable, including the popular iShares Core S&P 500 ETF (IVV) that commands nearly $450 billion in assets and holds the 500 largest U.S. stocks including Microsoft (MSFT) and Apple (AAPL). The exchange-traded fund charges investors a mere 0.03% in annual expenses, which on a $3,000 tax return adds up to just 90 cents per year!

If you want to grow the money quickly, you can purchase these products in a taxable brokerage account. As you may have guessed, however, you'll have to pay taxes on the profits down the road.

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This impressive price action once again came at the hands of several mega-cap tech and communication services stocks. Among the biggest gainers were artificial intelligence (AI) chipmaker Nvidia (NVDA) and Facebook parent Meta Platforms (META) – two of the Magnificent 7 stocks – that have surged roughly 80% and 40%, respectively, so far this year. 

New S&P 500 stock SuperMicro Computer (SMCI) created its fair share of tailwinds, too, with shares of the AI infrastructure firm quadrupling since the start of the year – and gaining $41 billion in market value along the way. (Although, this is peanuts compared to the $1 trillion in market cap Nvidia added in Q1.)

Are we in a bubble?

The fast and furious rise in these stocks has led to lofty valuations across the equities market and has several folks questioning if what we're seeing is similar to the dot-com bubble from the early 2000s. There are many ways to spot a bubble, and experts see distinct differences between the two time periods. 

"As was the case in the rally leading up to the March 2000 S&P 500 high, the recent market rally has featured a relatively small number of technology-oriented stocks pushing the S&P 500 higher," says Scott Wren, senior global market strategist for Wells Fargo Investment Institute. 

Wren points to a key difference between then and now: The quality of the companies leading markets higher.

"Today, the companies driving the rally are showing strong revenue and earnings growth to go along with robust balance sheets and acceptable debt levels," the strategist says. "Back in 2000, many of the companies carried the SPX to record levels based on high hopes of one day producing strong revenues and earnings." 

That's good news for bullish investors hoping to ride the wave higher – but there's a lot at stake over the next three months that could quickly shift sentiment. 

With this in mind, we'll take a look at the Q2 investing outlook and how the key themes experts are watching could impact portfolio returns.

Earnings

First-quarter earnings season kicks off in two weeks when big banks such as JPMorgan Chase (JPM) and Bank of America (BAC) report. Q1 saw turbulence in the regional banking industry after New York Community Bank (NYCB) crashed on commercial real estate concerns.

Rodrigo Sermeño, associate editor for The Kiplinger Letter, believes declining values in office buildings will continue to pressure some banks. But large banks "should avoid the stock sell-off because they are more diversified and have set aside greater reserves to cover potential loan losses than smaller banks."  

As a group, analysts have been less pessimistic about the upcoming earnings season, says FactSet Senior Earnings Analyst John Butters. Companies, however, have been more pessimistic. This has resulted in earnings estimates that are lower today vs where they were at the start of the year, he adds.

Still, S&P 500 earnings are expected to be up 3.4% year-over-year in Q1, which would mark a third straight quarter of growth.

For investors, the fact that stock prices and valuations are high heading into earnings season "leaves little room for disappointment if companies fail to deliver strong earnings," says Clark Bellin, president and chief investment officer at Bellwether Wealth. 

However, negative earnings reactions can create opportunities for tactical investors.

"On pullbacks, we will be buying the dips of high-quality earnings names, just as we did in October 2022 and November of 2023," says Nancy Tengler, chief executive officer and chief investment officer of Laffer Tengler Investments.

Inflation and rate cuts

The first quarter reminded Wall Street that the final stretch to bring inflation down to the Fed's 2% target will be the hardest. Consumer Price Index (CPI) reports for both January and February came in higher than economists were expecting, due mostly to stubbornly high shelter inflation. 

"CPI ex-shelter has been below 2% since June – where a lack of supply has met structural demand, pushing prices ever higher," says Ross Mayfield, investment strategy analyst at Baird Private Wealth Management. However, recent data, such as Redfin's report that new listings hit a two-year high of 3.8% in February and a fourth straight monthly increase in homebuilder confidence, according to the National Association of Home Builders (NAHB), are encouraging, Mayfield notes. 

"Whatever the root cause, multiple forces are working in favor of more inventory – that's good for buyers and the Fed, alike," Mayfield adds.

Still, sticky inflation has pushed back expectations for the Fed to start lowering the federal funds rate from its current 23-year high. 

"The current expectation is that the first Fed cut will take place at the June 12 meeting," says David Payne, an economist at Kiplinger, in his interest rate outlook. Typically, the first rate cut would be followed by additional rate cuts at every other meeting. However, to avoid being "a lightning rod during the presidential campaign season," the Fed may cut on June 20, July 31 and again on November 7, immediately after the election."

If the Fed does cut rates in June, stocks could potentially see a short-term tailwind. According to Charles Schwab, since 1929, the S&P 500 has averaged a 9.9% gain in the six months following an initial rate cut. This improves to 13.4% at 12 months out.

Rate cuts could be good for the bond market too. "We have shown on multiple occasions how bonds have always rallied in the three months before the first rate cut going back to 1970, says Joseph Kalish, chief global macro strategist at Ned Davis Research.

IPOs

The first quarter saw thawing in what has been an ice-cold initial public offering (IPO) market in recent years. According to Renaissance Capital, there were 30 public offerings through March 28, up 20% year-over-year. And the $7.8 billion raised from these offerings triples what was raised in Q1 2023.

Enthusiasm around generative artificial intelligence resulted in an exciting debut for Astera Labs (ALAB), a company that makes data center connectivity chips for cloud and AI companies. This was followed by strong demand for the Reddit IPO, with both events sparking hope that more offerings will soon hit the market.

The list of upcoming IPOs looks exciting, with names such as Kim Kardashian's shapewear brand Skims and online sports retailer Fanatics among those rumored to be going public soon, prompting concerns beginner investors understand what an IPO is before getting swept up in the hype.

One potential offering that Sophie Lund Yates, lead equity analyst at Hargreaves Lansdown, is upbeat about is Databricks, a cloud-based storage and software firm. 

"The AI boom would definitely be a tailwind and should offer a structural growth opportunity," Lund Yates wrote in a note. "Databricks itself isn't ignoring the hype, having acquired generative AI company MosaicML for $1.3 billion in June. The company is hoping it can integrate this tech into its own products."

A rebounding IPO market indicates "an uptick in enthusiasm from both IPO issuers and investors, hinting at shifting market dynamics and a more welcoming landscape for public listings," writes George Chan, global IPO leader at EY.

However, investors should be cautious before buying IPO stocks. While some companies have strong first-day showings, returns over the next year tend to be weak, says the team of analysts at Trivariate Research, a market research firm based in New York. And since 2020, "the average IPO has lagged its industry average by 30% over the subsequent three years following its first closing price."

Bitcoin

Bitcoin went on a monster run in Q1, spiking nearly 70%. Helping the cryptocurrency was the late-January regulatory approval of the first spot bitcoin ETF (exchange-traded fund), which gives "investors direct exposure to the price of bitcoin without the complexities of managing bitcoin ownership directly," says Mason Mendez, investment strategy analyst at Wells Fargo Investment Institute. 

Between January 11 and March 28, assets under management (AUM) of the 11 spot bitcoin ETFs on the market reached a jaw-dropping $58 billion, according to Mendez.

More upside could be in store for the digital currency considering the upcoming bitcoin halving event, expected to occur in mid-April.

"Historically, bitcoin halvings have been associated with significant price increases in the cryptocurrency," writes Kiplinger contributor Randy Ginsburg in his feature on bitcoin halvings. "The theory behind this is simple: As the supply of new bitcoins entering the market decreases, the demand for them could surpass the supply.

Before buying bitcoin in hopes it will continue to rise, though, let's remember that the cryptocurrency market remains highly speculative and should be approached with extreme caution. For those interested in dipping their toes into the crypto space, it is crucial that they do their research and only use money they can afford to lose. 

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I often find that beginning investors want all the upside of the stock market and get upset when they see the market fall. Many times, they will pull the trigger too early and sell. They don't realize that markets will have dry spells and that some volatility is inherent in the investing process.

But how can folks avoid some of these investing mistakes? Here are some simple rules to follow when first starting your investing journey. The goal, we hope, is to help you avoid typical beginner investing mistakes.

Prepare for volatility. Unless you put all of your money into certificates of deposit (CDs) or money market funds, you can expect to see some variability in your returns. One tool to gauge how volatile a specific stock is in relation to the broader equities market is its beta. 

The S&P 500 has a beta of 1.0. So, a stock with a beta above 1 typically means it is more volatile than the broad market, while a beta below 1 signifies that the equity is less volatile.

Don't invest money that you've set aside for emergencies. Emergency funds are important and we have them for a reason. Leave enough cash to have in case of emergencies or being let go from work. Put this money in a high-yield savings account or even your checking account that you can easily access. 

Ideally, you have enough saved to cover at least three to six months of living expenses. By not putting this money in the stock market, it will not be subject to any kind of volatility or sudden price drops. Additionally, emergency funds should not be put in a CD or similar account where there are withdrawal penalties.

Don't borrow money to invest. Investment returns are not guaranteed, especially in the short term. You could end up paying more in interest and being stuck in more debt if you borrow money to buy stocks. 

Along similar lines, don't use money that should be spent on paying down current debt. Debt reduction comes ahead of investing. Once this is under control, especially with your credit cards, you can put the after-debt excess in various investment vehicles.

Build a pyramid of liquidity. For example, keep some of your excess cash in easy-to-reach vehicles such as savings, checking or money market mutual funds at a brokerage firm. This will allow you to leave your best long-term investment stocks in your portfolio and grow their returns over time.

Diversify slowly. After that, some portion, not the bulk of your excess investment assets, can be put in CDs. Don't put all this excess money into stock market funds. This will allow for a no- to low-risk way to grow your money. And rates are attractive right now, with several 1-year CD rates above 5%.

Money market accounts also give folks a safe place to store their money and get a decent rate of return. Some of the best money market accounts right now are offering yields over 5%.

Study your investing options. Still, arguably the best way to grow your money over time is in the stock market. For beginners, investing your hard-earnings cash in the stock market is best handled by first buying mutual funds, especially no-load mutual funds that don't have a commission or sales charge, and/or low-cost ETFs (exchange-traded funds). These are baskets of equities that spread the risk around, and investing in these first will allow you to develop a feel for the intricacies of the equities market.

Only after doing that for some period should you venture out and invest in individual stocks.

Stick with dividend-paying stocks. The best outcome over time for both beginning investors and long-time market participants is to buy stocks with larger market capitalizations (i.e., over $100 billion in market value) that pay regular dividends. 

An example of one of the best dividend stocks around is Coca-Cola (KO), which has a roughly $260 billion market cap and has paid out and raised its dividends annually for the past 62 years. If you don't believe us, just ask Warren Buffett, who first added KO to the Berkshire Hathaway equity portfolio back in the 80s. In his 1988 letter to Berkshire shareholders, Buffett said he expected to hold on to the stock "for a long time" and indeed he has.

Don't invest in speculative stocks. Avoid tip stocks (someone gave you a tip about a potential high-flyer) with no earnings, no dividends and a small market cap.

The best stocks to buy are those that you can live with over a long period. Don't try and make a killing with your first investing forays. The odds are arguably not going to be in your favor. This is especially true with penny stocks and/or cheap stocks trading below $5 to $10 per share with no dividends. 

Among the many reasons to avoid these low-priced stocks is the lack of liquidity, or the number of shares being bought and sold. This makes the stocks "the perfect vehicles for "pump-and-dump" schemes where stock promoters lure investors to buy shares, increasing the stock price," writes Dan Burrows, senior investing writer at Kiplinger, in his feature on why you should stay away from penny stocks. "Once the price gets high enough, the pumper sells his shares, causing the stock to fall and leaving investors with poor returns, or even losses. Anyone here see The Wolf of Wall Street?"

Also avoid stocks with earnings so low that their price-to-earnings (P/E) ratio is very high (i.e., over 30x for the coming year).

Find good investing research. There are plenty of free websites such as Kiplinger that offer sound information to help guide your investment journey. Many sites such as Yahoo Finance, Morningstar and StockCharts allow folks to research potential investing opportunities.

Doing your proper research and coming up with a plan will allow you to improve your long-term investment returns with decent results. It will also allow you to weather difficult investing periods when the market takes a downturn.

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