Wondering what to compare between your VAS from your VDHG? Can't tell the difference between your IOZs and your A200s? Before you make an investment, it can pay to understand the differences between seemingly similar ETFs. Read on, and you'll form a keen grasp of how to choose between similar ETFs.

What to compare

It might be tempting to look only at historical performance or dividend yield and be done with your decision.

Sure, these are important, but they only give you a partial view of what you’re investing in. There are so many other factors to consider, which we’ll dive into below.

Your investing goals

What you invest in usually comes back to your investing goals . You might be seeking a new source of passive income (perhaps so you can retire early !), or maybe you’re more focused on growth.

When you’re comparing similar ETFs, see which one best suits your objectives. For example, one might be more geared towards growth stocks in the tech industry. These are inherently riskier, but do come with the potential for higher financial rewards. Another may have a heavier leaning towards established companies and paying dividends. This could make it a safer (but not guaranteed) bet that it provides regular payments, too.

Holdings

To best weigh up what two different ETFs contain, do a deep dive into each one's portfolio.

You’ll first want to look at the diversification and concentration of each ETF. For instance, one could have most of its investments concentrated in only a few stocks. This kind of heavy weighting means its overall performance is very reliant on the success of a small number of stocks, which could increase its risk. The other might be more diversified, meaning its investments are better spread out across several stocks – potentially lowering its risk.

You also want to assess the quality of their holdings. Research their top 10. Gauge things like their performance history, financial health, market position, industry conditions, risk factors, and future growth potential.

For very similar listed ETFs, the holdings may be more or less identical. (Such is the case with IOZ and A200 , which both track the performance of the top 200 companies on the ASX .) This is where analysing other factors (like the ones below) can be useful.

Size

You may have encountered the term "assets under management" (AUM). It’s basically a representation of an ETF’s total value, and it can give you an indication of the size (and success) of different ETFs.

Larger ETFs tend to be stabler and more liquid, and generally have lower expense ratios (i.e. fees). Smaller ones often provide exposure to more niche markets, and may have the potential for higher growth.

Compare AUM to see which one better suits your investing strategy , risk tolerance, and goals.

Tenure

An ETF’s tenure refers to how long it’s been operating. It’s an important measure because it gives you insight into how established an ETF is. It also gives you a stronger idea of things like long-term performance, management experience, trading volumes, and investor confidence.

That’s not to say that newer ETFs are worse investments. They might come with more risk, simply because they don’t have a proven track record. But they could have the potential for greater growth, more innovative management strategies, and exposure to emerging sectors or trends.

This is where understanding your risk tolerance comes in handy. If you’re more comfortable investing in something with demonstrated credentials, an established ETF could be a better fit.

Performance history

Obviously, performance is a major factor when comparing ETFs. It’s absolutely true that past performance doesn’t always indicate future performance. However, it can give you insight into what you could expect from an ETF.

Look at historical returns over a long period (say, 10 years) to see how each ETF has fared through market highs and lows. If they’re really similar, the difference may be negligible. But you will get some insight into how each ETF has handled risk and volatility.

You can also assess shorter time frames to support your performance research. These give you an idea of how ETFs have performed through recent trends, which might not be evident in long-term data.

Fees

All ETFs have what’s known as an ‘expense ratio’. This is how much the ETF spends on operations each year (think costs like management, admin, marketing and so on) in relation to its net assets. Expense ratio is expressed as a percentage.

This is another crucial metric to compare because it shows you how much you’ll pay between similar ETFs. ETFs are generally low-cost, but over time, higher expense ratios may wear down your returns.

Tracking error

Tracking error shows how closely and consistently an ETF’s performance follows its benchmark index. This could be a stock market index, or the value of a certain currency or commodity.

Tracking errors generally aren’t huge, but they can influence your returns. A high tracking error reveals a greater deviation from the index. A low tracking error shows the ETF is more or less able to match it – indicating that it can mirror the index’s returns.

While in some instances a high tracking error can be advantageous, you generally want a low one when it comes to ETFs. When you’re sizing up multiple ETFs that track the same index, tracking error can be an effective way to see which one might offer superior returns.

Liquidity

One of the main advantages of ETFs is that they’re liquid assets. This simply means they can be bought and sold fairly easily on the stock market, without having too much of an impact on their price. Liquidity becomes important when you’re buying or selling an ETF because it affects how close the final trade price is to the quoted market price.

However, liquidity profile does vary between ETFs. This is why it’s another great assessment tool when you’re tossing up between comparable investments.

You can also review the trading volume of each ETF to determine liquidity. Trading volume refers to the number of units being traded and is a good sign of interest in an ETF. A high trading volume suggests an ETF has strong interest. In contrast, a low trading volume conveys less buying and selling activity. You’ll generally find that ETFs with higher trading volumes are more liquid.

Distributions

Many ETFs provide payments known as distributions. These might come in the form of dividends , or they may circulate the capital gains made from selling off securities among shareholders. Some ETFs automatically reinvest dividends on your behalf rather than paying them out in cash, which lets you take advantage of compound interest .

Find out their dividend yield (if you’re comparing dividend ETFs ) and distribution frequency. They may pay monthly, quarterly, or annually, which can impact your cash flow. Also consider how distributions could shape your tax position and investing goals.

Environmental, Social and Governance (ESG) criteria

If you’re weighing up ESG ETFs , do some research into their ESG criteria. ESG scoring can differ between ETFs, so you want to get a clear idea of how they define ESG and how they apply their filters. For example, one ETF might filter for carbon neutrality, whilst another may filter for diversity in leadership.

How to compare ETFs

Now, should you want an easy way to do a side-by-side comparison of similar ETFs, look no further than Pearler’s Compare tool .

You can plug in up to three different ETFs, exploring fundamentals like their price, historical performance, and purchase fees, to figure out which one might best suit your strategy. You can also view how many Pearlers are invested in each ETF to give you an idea of their popularity among our community.

Case study: Comparing two similar-looking ETFs

In the example below, we’ve looked at some of the basics of iShares Core S&P 500 ETF (IVV) and Betashares Nasdaq 100 ETF (NDQ) . Both ETFs track some of the top US stocks (Apple, Microsoft, Alphabet, and so on). Their holdings make them quite similar, and thus many investors find themselves tossing up between the two.

Click through the gallery below on Pearler's Instagram and you’ll see some of the ways they differ.

So, should you hold multiple similar ETFs at once?

There’s no right or wrong answer here. In some cases, holding several similar ETFs may be advantageous to your investing strategy. For example, two ETFs could be in the same sector but have slight variations in what they hold. Or, you might have the opportunity to balance a lower expense ratio in one ETF with higher growth potential in another.

However, you do risk underdiversifying . This is why you want to consider:

• Overlap. There may be some difference in holdings between ETFs, but you’ll often find that very similar ones contain many of the same assets – like IOZ and A200, for instance. If there’s too much overlap between ETFs, you may not be diversifying enough
  
• Bias. By investing in numerous ETFs that more or less do the same thing, you’ll have a large concentration of your money in a particular sector, stock, or market. This means your investments will be majorly impacted by any blows to that sector, stock, or market
  
• Exposure. Putting all your money into comparable ETFs can limit your exposure to other sectors, stocks, or markets that could be lucrative

Keen to learn more about ETF selection? Check out our guides to ‘ How to choose the right ETF ’ and ‘ How many ETFs is too many? ’.