Advertisement
Investing

How to Evaluate ETFs

A low expense ratio is important in choosing an ETF, but so is the fund's strategy.

A low expense ratio is important in choosing an ETF, but so is the fund's strategy. Just because two ETFs have the word technology in their names doesn't make them equivalent. Check an ETF's prospectus for details about its underlying index to make sure that its strategy seems sensible. Also be sure you understand how the fund tracks its index. "Whether an ETF buys the underlying securities or gets its exposure through derivatives is very important" in terms of how the fund will track its benchmark, the tax treatment it receives and the risks it takes on, says Jim Ross, co-head of the ETF business at State Street, sponsor of the SPDR line.

Advertisement - Article continues below

The ETF sponsor's Web site should provide information on a fund's allocations and top holdings. Run a reality check on this data before you invest. For example, does the dividend fund you're considering hold 70% of its assets in utility stocks? If so, think of it as a utility sector fund rather than as a diversified dividend fund.

Past performance matters as well -- not in the sense that you should invest only in top-performing ETFs, but that you should compare a fund's past performance with its benchmark to make sure the fund has been following its index as planned (again, the sponsor's Web site should post this information). Some bond ETFs and exotic ETFs in particular have done a poor job of tracking their indexes.

Finally, very new or very small ETFs sometimes trade inefficiently, resulting in wide spreads between their buy and sell prices or failure to track their benchmarks accurately. Wait for an ETF to gather at least $100 million in assets before you invest in it.

(For more on exchange-traded funds, see 4 Strategies to Make ETFs Work for You. And watch out for What Can Go Wrong With ETFs.)

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

The 5 Best iShares ETFs for a Core Portfolio
ETFs

The 5 Best iShares ETFs for a Core Portfolio

You can assemble a simple, diversified and dirt-cheap portfolio using just a handful of the best iShares ETFs from its 'Core' series.
September 18, 2020
50 Top Stock Picks That Billionaires Love
stocks

50 Top Stock Picks That Billionaires Love

These 50 companies, of various shapes and sizes, are among the top stock picks held by billionaire investors or high-asset hedge funds.
September 4, 2020
7 Actively Managed ETFs to Buy for an Edge
ETFs

7 Actively Managed ETFs to Buy for an Edge

Actively managed ETFs are starting to blossom in popularity. Investors unfamiliar with the space can start with these seven active funds.
September 1, 2020
10 Best Stocks to Buy If President Donald Trump Wins Re-Election
stocks to buy

10 Best Stocks to Buy If President Donald Trump Wins Re-Election

The 2020 election likely will be a pivot point for several areas of the market. Here are some of the best stocks to own should President Donald Trump …
August 31, 2020