How do you pick the right ETF?

Hi Elena,

Great question. I wrote a bit of a checklist for new investors that you might find useful: https://pearler.com/explore/learn/blog/invest...

I personally choose based on big picture things first. I go for the big building blocks when creating a portfolio – total market index funds that are low cost. That filters out the rubbish and I’m left with a bunch of sensible long term choices.

But there are other ways to invest than that. Red flags to me would be small fund size (say less than $100m under management), high fees (say over 0.5%), a small portfolio of stocks (say less than 50). It does also depend on the strategy one is trying to follow.

Picking the big building blocks first lets you then have fun with a smaller part of the portfolio and it doesn’t matter too much how well it goes.

Cheers, Dave

Choosing the right ETF (Exchange-Traded Fund) involves considering several factors to ensure it aligns with your investment goals, risk tolerance, and financial strategy. Here are some key factors to consider and potential red flags to watch out for:

1. Investment Objective: Understand the primary goal of the ETF. Is it to track a specific index, sector, commodity, or region? Make sure the ETF’s objective aligns with your own investment goals.

2. Performance History: While past performance is not an indicator of future results, it can provide insights into how the ETF has managed under various market conditions. Look at long-term performance over different market cycles rather than short-term gains.

3. Expense Ratio: This is a critical factor as it directly impacts your returns. The expense ratio is the annual fee that all funds charge their shareholders. It includes everything from management fees, administrative fees, and operational costs. Typically, passively managed ETFs have lower expense ratios than actively managed ones. Comparing expense ratios among similar ETFs can help you choose a more cost-effective option.

4. Liquidity: Check the average daily trading volume. ETFs with higher liquidity have tighter bid-ask spreads, which means lower trading costs for you. Low liquidity can lead to higher trading costs and price volatility.

5. Tracking Error: This is the difference between the performance of the ETF and the performance of the index it is supposed to mimic. A lower tracking error indicates that the ETF is more accurately replicating the performance of its benchmark index.

6. Tax Considerations: Be aware of the potential tax implications, such as capital gains tax, when you sell your ETF shares at a profit. Understanding the tax efficiency of an ETF can influence your decision, especially if you are investing in a

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