How to choose an ETF

Selecting an Exchange Traded Fund (ETF) may be an overwhelming process. We believe it all starts with asking the right questions.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

What to consider

Exchange Traded Funds (ETFs) enable investors to gain low cost and transparent access to a broad range of asset classes. We believe there are eight key areas for ETF investors to consider as part of the due diligence process.

  • Not all ETF issuers are created equal. It is important to understand factors such as product breadth and the ETF portfolio management processes.

  • Exchange traded funds (ETFs) can be built using a variety of different replication delivery mechanisms. It is important to understand the differences in these strategies as part of the ETF selection process.

  • It is important ETF investors understand how to evaluate the liquidity of an ETF and the different strategies available for trade execution.

  • Investors need to understand how well an ETF tracks its underlying index to evaluate the portfolio management performance of an ETF. Although an ETF seeks to track an index, success can vary, and a variety of factors can impact this.

  • Cost is an important consideration when making any kind of investment. While the TER is the most often quoted ETF expense, TCO analysis looks deeper and provides a more holistic view of portfolio costs.

  • Tax is an important consideration for any ETF investor. Investors should refer to the taxation section set out in an ETF prospectus prior to investing.

  • ETFs have two potential sources of revenue from securities lending activities: securities lending (within the fund) and ETF unit lending. It is important to understand both during the ETF due diligence process.

  • Assets in dedicated sustainable investing strategies have grown at a rapid pace and are set to accelerate even further over the next decade. Environmental, social and governance analysis may help uncover hidden risks and opportunities in portfolios that could go undetected by traditional financial analysis alone.

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