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What are the factors to consider when selecting an ETF to invest in?

What should I look out for?

Discussion (2)

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  • Investment objectives -- this will indirectly be tied to what type of ETFs you want to invest in. If you are looking to have broad market exposure, chances are you are looking passively managed ETFs that have no style bias. If you are looking for alpha, then you are looking for actively managed ETFs. Note that actively managed ETFs tend to cost more than passively managed ETFs. However, even within the passively managed space, there are thematic ETFs which could give you unique exposure.
  • Cost, more specifically, the total expense ratio (TER). TER is the total operating cost of managing a fund. Cost matters. Do not let anyone tell you otherwise. Of course, you should not be investing in a product solely based on the TER. If you are looking for broad market exposure ETFs, going with the cheapest option would be ideal. When it comes to the thematic/smart-beta ETFs, it would be ideal to pay a little more attention to what is under the hood.
  • Tracking error. Passively managed ETFs tracks a benchmark. The more efficient it is at tracking a benchmark, the lower the tracking error. Some of the largest ETFs in the world, SPY, VOO, VTI has no tracking error over the long run (more than 10 years of performance track record). Conversely, if you are investing in an active ETF, chances you are looking for outperformance against a benchmark, and tracking error will generally be high since the active share for an active fund should generally be high.
  • Country of domicile. If the ETF is domiciled in the US, it subjected to 30% dividend tax withholding, whereas an Irish-domiciled ETF is at 15%.

Hope the above helps.

On a side note, I am starting a financial blog which focuses on ETFs. Do check it out.

https://investment-blueprint.com

Ang Yee Gary

21 Sep 2019

Medicine at National University Of Singapore

Costs
Tracking errors
Liquidity (bid and spread difference)

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