There are so many ETFs out there, which one should you be investing in?
in this video i will outline 3 key things that you should be considering
before you invest in an ETF so make sure you watch till the very end
hey guys it's Dan here and welcome back to my
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so before we dive in how to pick an ETF i
want to make sure that you understand exactly what an ETF
is the full non-abbreviated name is Exchange Traded Funds and it is
exactly what the name says these are funds that are traded on an
exchange just like how you would trade shares of
a company on the New York Stock Exchange for example
traditionally if we wanted to invest in funds we would directly approach our
brokers or the fund providers and this would normally be in the form
of mutual funds where we can buy or sell units of the
fund and typically you're only able to trade once per day
after the market has closed but thanks to the concept of ETFs
investors are now able to invest in these funds
via the stock exchange and trade them during the normal hours
of the market as you would with any other company stock
alright so usually you'd start off with asset classes
and composition ask yourself what kind of assets are you interested in
for most of us it'll probably be equities but some may want to invest in
bonds commodities like precious metals or even
real estate investment trusts and that's really the first level of
diversification then you would think about
diversification at the country level whether you're investing in foreign
government bonds or in well-known foreign companies like Alibaba or
Samsung the next step is to think about the
weightings of each component in the portfolio for example you may
choose to have even allocations between bonds and equities or even commodities
and if that's the case there are ETFs that have different weightings of those
asset classes depending on how much risk you're
willing to take obviously you won't be able to find an ETF that
fits exactly what you want but there should be plenty that you can
choose from take a few of the iShare's Core ETFs for
example they offer a conservative allocation
moderate allocation growth allocation and even an aggressive
allocation so the more aggressive the ETF the more
weighting is placed on equities and that usually
means more US equities for pure equities you have a lot more
choice you can invest in ETFs that track an index
like the S&P 500, Dow Jones, Nasdaq Russell 1000 etc, you can also invest
based on a sector by ETFs that track the healthcare sector
the semiconductor industry etc or invest based on a specialization like
5G robotics and AI and even electric
vehicles the key thing here is that if you're
planning to trade ETFs fairly often make sure that the trading volume of the
actual ETF and of its underlying securities are
high so that there are lots of buyers and
sellers and this usually means that the bid-ask spread
is low or tight, for example an ETF that invests in the Nasdaq
will probably be more liquid than an ETF that invests in an overseas index
and the stock-like attribute that ETFs have
is a clear advantage compared to mutual funds
now the second one is probably the most obvious one
and that is the costs of the ETF, this is usually disclosed in the form of net
expense ratios this fee essentially includes management
fees which is the cost paid to the managers of the fund
it also includes operating or administrative costs
for setting up promoting and maintaining that fund
etc so the amount of fees will change according to the nature and type of the
fund and funds are largely categorised into
two different groups you've got the active funds you've got
passive funds and very simply the difference is that
for active funds you've got a fund manager
that selects and trade stocks periodically
with the aim of trying to achieve the best returns for its investors with
passive funds they're built to track an index
industry sector or segment, they're basically a mirror of the benchmark so
there is no individual selection of stocks, but if you want to know more
about active versus passive investing just click on the link above here and
that should take you to one of my previous videos on this topic
and that is why active funds have a higher net expense ratio
best examples are Cathie Wood's active ETFs
she's known to be a proponent of disruptive technology so if we take
ARK Invest's innovation needs here if you'll see that her holdings are
in disruptive innovative companies selected by her essentially
the expense ratio currently stands at 0.75%
on the other hand index funds usually charge the lowest fees
as you'd only need to rebalance the portfolio periodically
to reflect a specific index you don't need to do much research at all
most index funds now charge less than 0.1%
for management fees for example the Vanguard S&P 500 ETF
charges only 0.03% in fees though the thing with these
index ETFs is that there are many of them that
track the same popular index, just for S&P 500 alone
you've got Vanguard, SPDR and iShares so you need to make sure you know the
difference in fees there's also one other thing you need to
know and that is the tracking differences
the truth about index funds is that it's not a definite
one-to-one match because when the index rebalances
the fund is required to rebalance as well and there will be some timing
differences and additional costs etc so when you're choosing an index
fund make sure you compare the fees and also their tracking differences and
one way you can do that is using ETF screeners like etf.com, it will show
you the tracking differences and some attributes of the fund usually
tracking differences are pretty tiny but when you stretch it over a long time
period it could become quite substantial the third one is the reputation and
performance of the fund as you would with a company stock you
look into the company's management the board of directors to basically see
who's at the helm and whether the team is competent enough
to run the company likewise with an active ETF you should
find out the manager behind that fund and do a little bit of digging into the
manager's background what funds have they managed before
how successful were they at managing those funds
and if they're well-known like Cathy Wood, you could watch her interviews
get to know what kind of investor she is and whether you believe
in her strategies, obviously past performances don't necessarily equate
to future performances but its past performances
should give you some indication of how it moves with the general market such as
the S&P 500 if an active ETF is obviously
trailing the market you may want to reconsider investing in that ETF
and you'll find that most of the active funds underperform the market
so most times you're probably better off just investing in index funds
that is what Warren Buffett also recommends, investing in low-cost index
funds because if you had invested $10,000
in the S&P 500back in 1942 it would be worth around $51 million in
2019 of course these 3 factors aren't the
only ones you should consider but they should form an integral part of your
decision-making process when you buy ETFs, other factors you
should also consider are the domicile of the ETF as this will give rise to the
tax implications and also other fund characteristics such
as the total amount of assets under management and so on, and a
good place to start would be the etf.com screener
you can go through the different filters apply the selections you want and choose
an ETF that best fits your needs I hope now you have a
better understanding of how to go about choosing an ETF, there are so many of
them out there but not all are worth investing and sometimes we
just need to spend a bit more time and effort
understanding some of those details of those ETFs
so that we can make the best investment decisions, thanks for watching and
make sure you subscribe to the channel if you want to see more of these videos
have an awesome day and i'll see you next time