Talking about ETFs is like talking about people. There are good ones, and there are bad ones.Jack Bogle
From its inception in the early 1990s until today, exchange-traded funds have evolved significantly and have undergone several changes.
ETFs have become popular for both individual and institutional investors. Increasing acceptance and recognition of ETFs are resulting in remarkable assets under management (AUM) growth reaching almost 10 trillion USD last year.
Over the years ETFs keep attracting with:
- wide range variety
- actively managed ETFs
- innovative strategies
- enhanced accessibility
- increased global reach
- evolving investment themes
- customization and personalization
- technological advancements
It’s important to note that while ETFs have many advantages, they may not be suitable for every investor or every investment objective. Today there are over 8,000 ETFs globally to choose from. Finding the best among them depends on many factors. The same is with choosing the path to the most suitable choice, as it may have many different directions.
This article aims to provide a comprehensive guide on how to pick the best ETF that aligns with your investment goals, risk tolerance, and time horizon. We will show where to start and arm you with plenty of pointers to navigate to the optimal result.
On the way to the best ETF
When searching for the best option when it comes to investing in exchange-traded funds, it is important to conduct thorough research. Take advantage of a range of tools and resources when gathering information, before you start evaluating certain ETFs.
ETF tools and resources
Utilizing multiple tools and resources can provide a well-rounded perspective on finding the best ETFs for your investment needs. We have gathered nine of the most useful tools available on the market.
1. ETF Database
Online platforms provide comprehensive databases of ETFs. These databases allow investors to search and filter ETFs based on various criteria such as:
- asset class
- expense ratio
- holdings, etc.
The most popular exchange-traded funds database competes against others with a tool and feature-rich platform, drag-and-drop strategy builder, backtesting capabilities, real-time market data, and advanced charting are good points, etc.
2. ETF screeners
An ETF screener is a tool or software typically available through financial websites, brokerages, or investment research platforms. They provide a user-friendly interface where investors can input their preferences such as asset class, sector, geographic region, expense ratio, performance metrics, and other factors.
It’s important to note that while an ETF screener can provide a good amount of information, including quantitative data, it’s always advisable to conduct thorough research and consider qualitative factors as well.
3. Financial news and media
Financial news outlets such as CNBC, Bloomberg, and Reuters provide coverage on ETFs. They offer news articles, analysis, and expert opinions that can help investors stay informed about the latest developments and trends in the ETF market.
4. Research reports
Research firms and financial institutions publish research reports on specific ETF topics. These reports provide in-depth analysis, performance comparisons, and recommendations on specific ETFs or ETF categories. Investors can access these reports to gain insights and expert opinions.
5. ETF issuer websites
The official websites of ETF issuers often provide detailed information about their ETF products. Investors can find information on investment objectives, strategies, holdings, performance, and other key metrics.
ETF issuer websites can be a valuable resource for understanding the specific features and advantages of different ETFs.
6. Social investing platforms
Social investing platforms like StockTwits and platforms with investing communities such as Reddit can be sources of insights and discussions on ETFs. Investors can join relevant groups, follow expert investors, and participate in discussions to gain perspectives and ideas about ETFs.
7. Financial Advisor
Seeking advice from a financial advisor can provide personalized guidance in selecting the best ETFs. A financial advisor can assess an investor’s goals, risk tolerance, and investment horizon to recommend suitable ETFs and help with portfolio construction. You can choose between traditional human advisors or a variety of digital platforms robo-advisors.
Choosing a human advisor with expertise in the industry can result in a higher level of personalized advice, going beyond just investment goals.
On the other hand, robo-advisors can be a cost-effective and convenient option for individuals who prefer a more hands-off approach to investment management.
While robo-advisors rely on technology and automation, they may also offer access to human advisors or customer support for more complex financial planning.
8. ETF Analytics tools
These tools offer detailed information on ETF performance, risk metrics, expense ratios, historical data, portfolio holdings, tracking errors, liquidity analysis, and more. ETF analytics tools are designed to help investors evaluate and compare ETFs based on a wide range of quantitative and qualitative factors.
It’s recommended to explore each platform’s features, trial periods, pricing, and user reviews to determine which tool best suits your specific needs and investment goals.
9. ETF industry conferences and webinars
Attending industry conferences, webinars, or seminars focused on ETFs can provide valuable insights. These events often feature industry experts, ETF issuers, and investment professionals who share their knowledge and expertise.
ETF evaluation points
No single ETF is universally the best for all investors, as individual circumstances and preferences vary. There are several key factors that you can consider when evaluating ETFs.
1. Alignment with investment goals
Determine what you aim to achieve with your investment, such as long-term growth, income generation, diversification, or exposure to specific sectors or regions.
For example, if you are seeking long-term capital appreciation, an ETF focused on growth stocks may be suitable. If you are an income-oriented investor, you can look for dividend-focused ETFs.
2. Research different ETFs
There are several types of exchange-traded funds that you can select from, each with its own investment objective and strategy.
- Bond ETFs
- Currency ETFs
- Inverse ETFs
- Liquid ETFs
- Index ETFs
- Gold ETFs
Use online resources, financial websites, and reputable ETF providers to explore the available options. Focus on the specific areas or strategies you are interested in.
Evaluating an ETF’s historical performance is important. Look for consistent returns over multiple periods and compare the fund’s performance to its benchmark index and similar ETFs in the category.
4. Expense ratio
The expense ratio represents the cost of managing the ETF. Lower expense ratios are generally preferred as they have a smaller impact on your returns. Compare the expense ratios of different ETFs within the same category.
5. Tracking error
Tracking error refers to the deviation of an ETF’s performance from its underlying index. Look for ETFs with low tracking errors, as it reflects their ability to replicate the index’s performance effectively.
6. Diversification and holdings
Consider the ETF’s holdings and diversification. A well-diversified ETF can help mitigate risks associated with individual securities. Assess the sectors, geographic exposure, and concentration risks to ensure they align with your investment strategy.
7. Fund size and liquidity
Fund size can vary from small to large and liquidity from low to high.
- Small or niche ETFs can offer exposure to specific markets, sectors, or investment strategies that larger funds may not cover.
- Large funds tend to have more liquidity, and can potentially benefit from economies of scale, leading to lower expense ratios. Additionally, larger funds may attract more institutional investors, which can contribute to increased stability and trading volume.
- ETFs with high liquidity typically have tight bid-ask spreads, meaning the difference between the buying and selling prices is relatively small. This reduces trading costs for investors.
- Low liquidity funds can result in wider bid-ask spreads, which may lead to higher transaction costs and potential difficulty in executing trades.
8. Fund management
Evaluate the experience and track record of the fund manager. Research the manager’s investment philosophy and approach. Look for managers who have demonstrated expertise in the relevant asset class and have consistently achieved their investment objectives.
9. Transparency and disclosures
The best ETFs provide transparent information about their holdings, strategies, and expenses. Review the ETF’s prospectus and other available documents to understand how the fund operates and any potential risks.
10. Risk considerations
Consider the risk profile of the ETF, including market risk, sector-specific risks, and any other relevant factors. Assess the ETF’s risk management strategies and ensure they align with your risk tolerance.
Are you close to your own best?
Selecting the best ETF requires careful consideration of various factors. What is the best for one is not necessarily the best for the other investors. It is about finding your own winning combination.
You need to conduct thorough research and review all relevant information before making any investment decisions. The focus should be on defining your investment goals, researching different categories, analyzing performance data, evaluating fund size and liquidity, considering expense ratios and tracking errors, checking holdings, assessing fund management, and reviewing the prospectus.
Remember that investing in ETFs involves risk, and past performance is not indicative of future results. Seek professional advice if needed and regularly review your investment strategy to ensure it remains aligned.
With the right approach, ETFs can be an excellent tool for achieving your investment objectives. Good luck!