Exchange-traded funds are all quite unique, and vary in their desirability for certain investors depending on the type of asset they track, the sector they are focused on, or the level of risk they carry.
Despite their differences, there are common factors of ETFs that you can use to consider what may best fit your investment needs.
Markets and sectors
As explained earlier, exchange-traded funds can track any number of markets, sectors or commodities, which is why it’s important to consider what the fund you choose to invest in is tracking.
If you’re a green investor, or someone interested in sustainability, you likely wouldn’t want to invest in a fund that tracks industries related to fossil fuels. Another example is gambling or tobacco: if you are not interested in investing in these types of companies, then you would also not want to choose a fund that tracks a related market or sector.
Dividends
Dividends are also known as distributions, and while many ETFs do pay out dividends, some may not. It’s always worth knowing what you will and will not be receiving from the investment–and how regularly these dividends (if any) are paid out.
Commonly, dividends are distributed annually, but they can also be paid out on a semi-annual or quarterly basis. Quarterly dividend distributions may be more attractive to investors, due to the more regular pay-outs.
Along with understanding how regularly dividends are paid out, it’s also important to understand the dividend yield of the ETF. The dividend yield is the percentage of the purchase price paid in dividends during the prior 12 months.
Active or Passive ETFs?
An ETF can either be passive or active: passive ETFs are those that passively track an index and usually aim to match its performance, while actively-managed ETFs aim to outperform the index. Due to being actively managed, they usually have higher management fees than those that are passive.
Management Fees
As stated, active ETFs usually have higher management fees. But, even if it’s a fund passively tracking an index, you will still encounter management costs. It’s important to note that these differ from brokerage fees, which is the cost you are charged by your broker when purchasing the ETF.
Management fees, on the other hand, are charged on an annual basis and are expressed as a percentage. The ideal figure is 0.2% or under, but they can be as high as 1%.
History: Performance, Investor Trust and Longevity
While past performance is not an indicator of future performance, it’s still a helpful guardrail when choosing which ETF to invest in. It’s also important to consider performance–being the return on investment it provides investors–as well as when the fund was established—as the longer the fund has been in existence, the more reliable track record it has to demonstrate performance over time. Newer funds shouldn’t be disregarded by investors because of this fact; it simply be a consideration.
That’s especially true when it comes to looking at the history of returns. A fund that has been around for quite some time will be able to showcase its five- or even ten-year return history, while a fund still in its infancy may only be able to provide its return history for the past 12-months.
This is a key reason that while comparing a range of ETFs to collate the above list, Forbes Advisor looked at both one-year and five-year returns.
Read More: Guide To The Best ETFs For Australians In 2023 – Forbes Advisor Australia