How do I choose an ETF?

Question

What should I look for in terms of performance, what's a good Management Expenses Ratio, and what other factors should I consider?

Answer

Hi Natalie.  Lots to unpack here!

Choosing an ETF first comes down to how you want to invest.  Do you want something which is simple and very diversified, like an ETF which covers an entire market like Australia or the US, for example?  Or do you want something which is very specific which only invests in technology, or a certain theme?

In terms of performance, it’s counter-intuitive, but you don’t want to just look at past performance.  A fund which has performed great for the last 3 years, may perform horribly for the next 3.  Same is true for 5 and 10 year periods too.  That simply means looking backwards at performance isn’t really helpful when picking investments (I know that sounds very odd).  Instead of focusing on this, simply choose investments you believe in, which you are happy to own for the next 10+ years.

In general, the more diversified an ETF is, and the lower its fees, the more likely it is to end up having good long term performance.
 That’s why many people choose to invest in broad diversified ETFs with very low fees.   If you keep that in mind, it will serve you well :)

Answer

Hi Natalie,

There’s a new post on the Pearler blog (which I wrote), discussing this question «How Do I Research What to Invest In?»:  https://pearler.com/learn/blog/how-do-i-resea...

Hope you find it useful!
Dave

Answer

Hey Natalie,

I think the key here is really about you setting your investment strategy/philosophy/mandate before you start looking at the actual funds. What I mean by this is do you want to invest in passive, active, ethical, crypto, etc.?This will start to narrow the field of which investment options or ETFs make the most sense for you. For example, if you know you want to invest into Australian share index funds, you narrow down your options from thousands to around a dozen.

Then you can start to compare on fees, the reputation and track record of the investment manager, size of the fund etc.

Hope this makes sense, let me know if you’d like me to clarify any of the above.

Ben

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