As a starting investor, the investing world can be quite daunting. There are a lot of different investment vehicles and it can be hard to learn them all. To be completely honest, I don’t know them all either. Not even close! I can promise you that the classic long term investing approach is not difficult to learn. In my opinion, ETFs are a key part of a long-term portfolio. Arguably, the only thing you need. In this article, we are going to take a look at how you can pick a good ETF to add to your portfolio.
Before you can research whether a specific ETF is good or not, you have to know what type of fund you are looking for. This depends entirely on your strategy. If you want to learn a bit more about my strategy, you can check out the ETFs that I buy in this article.
You have to determine for yourself what ETF you want. There are a lot of different directions you can go: specific regions or countries, sectors, themes, … A good website that I use to research different funds is justETF.com. It has a good screener which can be used to filter on your specific needs!
After finding multiple ETFs that meet your criteria, it is time to check some parameters. I’m going to make a list of the ones that I find very important.
The first parameter that I take into account is fund size. The bigger the fund, the less likely it is to be liquidated. Bigger funds are usually bought by a lot of investors which also means they will be more liquid as well.
Arguably, the most important aspect of any ETF. The expense ratio shows what yearly fees are taking from the fund’s underlying assets. These fees are used to pay for the operating costs of the fund manager. Logically, this eats away part of your returns. The lower the expense ratio (or TER), the better!
Most good ETFs have a TER of around 0.20%. Some are even lower! This is quite a small fee if you compare it to the expense ratio of funds that are run by traditional banks!
Two different types of ETFs exist. Firstly, Funds that automatically reinvest dividends (Accumulating) and secondly funds that distribute their dividends (Distributing). If you don’t know what this means specifically, you can check out this article! The main reason for choosing either one is the tax regulation in your country. I live in Belgium and dividends are taxed quite heavily here. Accumulating ETFs are a good way to circumvent these taxes!
This one could be a bit less important but I like to take a look at it anyway. Every ETF needs to be provided by a company. All the ETFs in my portfolio are provided by a company called BlackRock. BlackRock is the biggest ETF provider in the world and is overall a profitable and reputable company. This can give some extra peace of mind when buying a certain ETF!
Certain ETFs could be trading on multiple exchanges. If this is the case take a look at the currency in which they are traded as well as how liquid the ETF is. If your main currency is EUR. I would prefer to buy it in EUR as well. Depending on which broker you use, converting fees could be applicable otherwise.
Before you can take a look at all the different parameters you will have to decide what kind of ETF you want. This all depends on the strategy you want to use! If you have worked out this first part, you will be able to use the tips I have given above on all the parameters!
I hope you now know how to pick a good ETF! If you would have any more questions, don’t hesitate to get in touch!