There are many financial advocates who preach about ETFs, including us. It is one of our most-loved asset classes, which we have invested in. In 2021, there were over 8,552 Exchanged-Traded Funds (ETFs) globally. For one that may not be financially savvy, you might be spoilt for choice and have no idea how to differentiate a good ETF. It can be tough to determine which product will work best for your portfolio. Hence, how should you evaluate which ETF best suits you given the ever-expanding ETF landscape?
What is an ETF?
An ETF is essentially a collection of stocks that represent the fund’s underlying strategy. ETFs are exchange-traded funds that aggregate money from other investors and are listed and traded on a stock exchange.
An ETF often seeks to track or duplicate the performance of a specified index, such as the S&P 500 or a commodity index. These index-tracking ETFs are passively managed by ETF managers and do not attempt to outperform the underlying index. Index tracking ETFs often offer cheaper fees and charges than actively managed investment products.
Key things to know about ETFs
- Objectives of the ETF – understanding the strategy of the ETFs and what they are investing in (Top 10 holdings, under the fund factsheet)
- Assets under Management (AUM) – A higher AUM, indicates a higher quality fund with a long track record
- Expense Ratio – This indicates how much of your investment in a fund will be deducted annually as fees
- Tax – It is important to understand what type of tax there potentially could be. For non-US persons there is a 30% withholding tax on dividends.
Why should you buy ETFs?
- Diversification – You can gain exposure to an index or a basket of stocks without having to invest in each of these stocks
- Cheap – Fees and charges tend to be lower for index ETF compared to actively managed funds
- Trades like a stock – It have similar liquidity to a stock
Investing in ETFs essentially kick-starts your passive investment journey. You don’t have to be so hands-on. Instead, if you invest with ETFs, it is an easy and no-brainer way to get started in the stock market. Furthermore, one study found that 95.56% of all actively managed large-cap funds in the U.S. underperformed their respective benchmarks over a 20-year period (from 2002 to 2021).
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Disclaimer: The information provided by LearnToInvest serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.