There are currently more than 8,000 exchange traded products (ETPs, which includes ETFs) globally1. The vast number, and accessibility of ETFs have essentially democratized investing. Whether you are a large institution, an advisor or individual, an ETF would give you the same access to the same market. Their aim is simplicity, but it’s still easy to get lost if they’re new to you. These key things to look out for when evaluating an ETF will help kickstart your journey.
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If you want to invest in ETFs, you’ll first need to know how to evaluate the performance of an ETF.
Performance doesn’t just mean how much money you make or lose as the ETF’s underlying index rises and falls. It is also about how closely the ETF matches the index performance.
The two ways to see how closely an ETF matches the index performance are ‘tracking error’ and ‘tracking difference'. Tracking difference addresses how closely the ETF tracks the index returns, while tracking error reflects how consistent over time the tracking quality is.
Both ways are equally important to determine how well the ETF tracks its index over time.
ETF Provider
Another important factor to consider when looking at performance is the provider.
In a fast-growing sector such as ETFs, there are a lot of ETF providers to choose from. Size, scale, expertise and commitment of the provider can vary significantly across the market, but are all important factors to consider as they can impact performance. Trusting that your ETF provider has the technology to keep down costs and manage risk is also vital.
ETFs come in many flavors and an ETF’s performance follows an index or sector closely, like the Hang Seng or S&P500. Also, different indexes select their holdings using different rules. Therefore, choosing which index to be the underlying base of your ETF is very important.
For example, there are a few indexes that cover Japanese equities, such as MSCI Japan and TOPIX. So how do you pick?
Ask yourself “What do I want an ETF to do?” when choosing an ETF:
In general, there are two types of ETF structures that you will come across:
Why should I care about an ETF’s structure? Both types of ETFs – physical and synthetic – have advantages and disadvantages and can affect the level of risk and the cost of managing an ETF. So, it’s best to know what you’re buying. Typically though, physical ETFs are the most common.
Learn more about ETF Structures.
You want to know how and when you can trade ETFs. Like stocks, an ETF can be traded anytime during the trading hours of the exchange that the ETF is listed on. This makes ETFs more liquid than a managed fund, which only trades once a day at the end of the day.
For investors trading large amounts of ETFs, it’s critical to further understand the multiple liquidity layers of an ETF.
Trading tip: Markets can be more volatile near the open and close. Consider trading ETFs after the first and before the last 20 minutes of the trading day2.
The great thing with ETFs is they generally cost less to invest in when compared to managed funds3
There are two costs you will incur when buying ETFs - transaction costs and annual management fees. Transaction costs are the fees you pay when buying and selling the ETF through your broker. The annual management fees combine asset management costs, bank charges, audit fees and tax that the ETF may be liable to pay on its investments. Adding these will help give you the complete total cost of ownership of ETFs to compare with other investment tools.
However, it is important to look beyond the management costs (such as Total Expense Ratio, Ongoing Charges Figure or other relevant fess relating to management fees) to determine the true total cost of an ETF.
As you know, there are many different types of ETFs, and some are riskier than others.
Subject to exchange rate movement
Sensitive to interest rate movements
Can be subject to more extreme market conditions
All financial investments involve an element of risk4
Got your investment goals in place? Don’t forget these three key things to help you choose the right ETF to help you achieve them.
Sources
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Comparing ETFs
This material is prepared by BlackRock (Singapore) Limited (co. registration no. 200010143N) for informational or educational purposes only. This does not constitute an offer or solicitation to purchase or sell in any securities or iShares Funds, nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
There are risks associated with investing, including loss of principal. The value of investments involving exposure to foreign currencies can be affected by exchange rate movements. Investment in emerging market countries may involve heightened risks such as increased volatility and lower trading volume, and may be subject to a greater risk of loss than investments in a developed country. Investors should be aware that the price of shares of the iShares Funds, and the income from them (if any), may fall as well as rise, and investors may not get back their original investment. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. iShares Funds are not sponsored, endorsed, issued, sold or promoted by their index providers. For details of the index provider including any disclaimer, please refer to the relevant iShares Fund offer document.
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