Here are five easy methods to compare ETFs (Exchange Traded Funds) and choose suitable ones for your security portfolio:

Expense Ratio: The expense ratio is the annual fee charged by the ETF to manage the fund. It’s important to compare the expense ratios of different ETFs to choose the most cost-effective option. Generally, lower expense ratios are preferable because they leave more of the investment returns for the investor.

Performance: You should evaluate the performance of ETFs over time to see how they have performed against their benchmark and other funds in their category. Look for ETFs that have consistent performance over the long term, rather than just short-term gains.

Holdings: It’s important to examine the holdings of an ETF to ensure that they align with your investment goals and objectives. You should look at the individual securities that the ETF holds, as well as the sectors and industries represented in the fund.

Diversification: ETFs provide investors with diversification across multiple stocks or assets, which helps to mitigate risk. You should choose ETFs that offer broad diversification across multiple sectors and industries.

Trading Volume: The trading volume of an ETF reflects the level of demand for the fund. ETFs with higher trading volume tend to have tighter bid-ask spreads, which can result in lower trading costs. Look for ETFs with high trading volume and liquidity to ensure that you can buy and sell them at reasonable prices.

Keep in mind that these methods are quite primitive, not exhaustive and that it’s important to conduct thorough research and analysis before making any investment decisions. So let’s dig a little deeper and look at some
additional parameters:

(note that the below are not applicable for all ETF’s)

Index tracking: ETFs are designed to track an index or benchmark, such as the S&P 500 or Nasdaq Composite. It’s important to evaluate how closely an ETF tracks its underlying index to ensure that you’re getting the returns you expect. Look for ETFs with low tracking errors and high correlations to their respective indexes.

Risk management: Some ETFs use risk management techniques, such as hedging or diversification strategies, to minimize risk and volatility. Evaluate how well an ETF manages risk and whether it aligns with your risk tolerance and investment goals.

Tax efficiency: ETFs can be tax-efficient because they generally have lower turnover than actively managed funds. Look for ETFs with low capital gains distributions and that are structured as “index funds” to minimize tax liabilities.

Fund size: The size of an ETF can affect its liquidity, trading volume, and bid-ask spreads. Generally, larger ETFs tend to have more liquidity and tighter bid-ask spreads, which can result in lower trading costs.

Fund manager: Consider the track record and experience of the fund manager or management team. Look for managers who have a history of successful investing and who are aligned with the interests of investors.

Expense breakdown: The expense ratio is an important metric, but it’s also helpful to examine how the expenses are broken down. Some ETFs may have additional expenses, such as trading costs or legal fees, that can affect their overall cost-effectiveness.

Investment style: ETFs can be classified based on their investment style, such as growth, value, or dividend-paying. Evaluate how well an ETF aligns with your investment style and goals.

But do you really need ETF’s?

Investing in funds is great for the lazy investor that seeks to diversify their portfolio. Personally, I would only advise investing in ETF’s as a private investor when investing in markets or products that are not otherwise within reach. For instance Korea requires a local securities account in the name of the beneficial owner. This makes it more difficult for a small private investor to invest in the market. You can also use ETF’s to get exposure to almost any asset class (fixed income, real estate, crypto currencies, you name it).

But what about the fees?

Assuming the market is going up by 8% per year and the ETF has an expense ratio of 0.25% per year, the impact of the ETF fees on your investment returns can be even more significant over the longer term.

Suppose you invest $10,000 in an ETF with an expense ratio of 0.25% per year over a period of 15 years. Without fees, your investment would grow to:

$10,000 x (1 + 0.08)^15 = $42,434.67

However, with the ETF fees of 0.25% per year, the actual growth of your investment would be lower. After 15 years, your investment would have grown to:

$10,000 x (1 + 0.08 – 0.0025)^15 = $38,954.15

The difference between the two is $3,480.52, which represents the amount you would lose in growth due to the ETF fees over 15 years. As you can see, the impact of fees on your investment returns can be substantial over a longer period of time.