Deciding on what ETF to invest your money in can seem like a difficult task. With thousands of options and so many features and statistics to look at, it is no wonder why so many potential investors get overwhelmed by the amount of information available to them. In the following article, we will look at 3 of the biggest factors to look at when selecting an ETF.
Choosing A Sector
The first thing you will want to figure out is what sector or category you would like to invest in. You might think that the technology sector is poised for a breakout year, or maybe you read that emerging markets is in line for a big rally. Narrowing down where you want to place your money here will help eliminate a lot of funds.
In our opinion, we believe it is important not to focus on too narrow of a sector when investing large portions of your total portfolio. Finding a diversified fund such as one that tracks the entire S&P 500 and making it the largest piece of your portfolio while complementing it with smaller investments in a few niche sectors you feel confident in can be a safer way to invest.
The first number you want to pay attention to once you have decided on the category is the expense ratio. The expense ratio is essentially the fee you pay to invest your money in that specific ETF. Some ETF’s have expense ratios that are fractions of a percent while others cost over a percent to manage. This fee is taken out of the overall value of the ETF and is reflected in your stock price. Lower expense ratios can make a big difference in the long-run when comparing total returns.
Once you have narrowed down the category and the expense ratio, now it is time to take a look at the popularity of the fund. A few numbers you want to look at here are the trade volume and net assets. An ETF with a lower level of assets (under $10 million) will most likely be a low-volume ETF. The lower the trade volume, the less liquid your investment will be and the higher the spread will be. This means that if you are looking for a short-term investment, this might not be the best option for you.
With that being said, you might also want to look at the start date of the fund. A newer fund may have a lower volume as of now, but if they differentiate themselves by having a much lower expense ratio than top competitors, trade volume might be set up to increase as investors might be attracted to the lower fees.
Overall, if you are a beginner simply asking what to look for in an ETF, use the following three points to help you navigate the broad ETF market:
1.) Make sure you find a diversified ETF that tracks a major index.
2.) Check the expense ratio and look for one that is below average.
3.) Look at the popularity of the fund by checking the trade volume and net assets. When in doubt, go with the more heavily traded option.
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If you are looking for a way to make more money on the side that you can invest into some ETF’s, check out our post that breaks down how people are making so much money online in their free time.