You’ve learned all about exchange traded funds (ETFs), and decided they are a good fit for your portfolio. But how do you pick which fund to invest in? Read on for three key things to consider when choosing an ETF.
1. The benchmark index
With over 1.5 million indices to choose from, deciding which benchmark index your ETF should track can be a tough task. Try to focus on finding the fund that best fits your trading plan; be that exposure to the FTSE 100, the US energy sector or all of Europe.
2. The fund’s size
A fund’s assets under management (AUM) should also be taken into account. This is because larger funds can benefit from economies of scale, allowing them to cut their fees and saving you money in the long run.
Additionally, a larger fund should have better liquidity than a smaller one. In general, larger liquidity in ETFs means lower spreads, so you can buy your fund for less and sell it for more.
3. The structure of the fund
There are two main types of ETF available. Physically replicated ETFs use assets to track their index, while synthetically replicated ETFs use derivatives.
Each of these types of ETF has different features and benefits that you should consider before buying. Physical replication, for instance, makes it easier to see what you are invested in and is generally considered less risky than synthetic replication. On the other hand, with some markets physical replication is either impossible or hugely inefficient.