Picking the right exchange traded fund (ETF) is not an easy task and it takes a discerning eye and the right amount of research to do so. In the U.S. there are over 1,000 ETFs for sale, and picking the right one for your portfolio is not just about reading the funds’ title. Liz Skinner for Investment News reports that many competing ETFs have the same expense ratios, so experts recommend that advisers look beyond fees and other costs associated with the funds to determine which ones can give investors an edge.[ETFs Are Not Out To Get You.]
Here are a few other tips on choosing the right ETF for your investment needs:
- Look at the underlying benchmark, not the name of the fund. Too many times the fund title can be misleading, and if you look at the actual holdings of the fund, you’d be surprised.
- Also be aware of how closely the fund tracks the index it is following. In some cases, however, the index is too large or some of the securities can’t be bought and sold easily, so the ETF will be designed using index optimization. With this technique, the ETF holds a representative portfolio of the index securities. Be aware: The more an ETF is optimized, the greater the risk of tracking error, which is the difference between the return of the index itself and that of the ETF. [ETF Investing And The Art Of Patience.]
- With an active ETF, managers buy and sell issues for the fund according to their own strategies, not based on an index.
- Other features advisers should examine are the ETF’s capital gains distribution history and whether it has a share-lending policy allowing the fund to lend shares to short-sellers for a fee, says Matt Hougan of Index Universe.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.