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Four things to check before you invest in ETFs

by , 11 November 2015

If you're looking to track the performance of the stock market or specific indices, exchange traded funds (ETFs) give you a way to do it.

So are there any aspects you should look at in specific ETFs when choosing one and before you invest?

Read on to find out…


ETF aspect #1: Check the TER

 
You should check the total expense ratio (TER) of ETFs before investing. The TER gives you the costs of an ETF as a percentage and includes the likes of admin costs and management fees.
 
You want to find an ETF investing in the asset or index you want with the lowest TER.
 
You can find this information on an ETF’s fact sheet.
 

ETF aspect #2: Tracking error

 
Ideally an ETF should track its benchmark index exactly, but there tends to be some variation. This is usually due to running costs.
 
You should check that the ETF you want to invest in tracks its benchmark closely. If it doesn’t it may be down to poor management or other costs that are excluded from the TER.
 
You can also find this information on an ETF’s fact sheet.
 

ETF aspect #3: Check the ETF’s NAV

 
An ETF should trade close to its net asset value (NAV). There are times when an ETF’s share price will fluctuate above or below its NAV. 
 
Just ensure you don’t invest when the ETF is trading at a premium to its NAV. This means you’re overpaying.
 

ETF aspect #4: Check out the spread

 
The difference between the buying and selling price of an ETF is the spread. You want to invest in ETFs where the spread is tightest. This is a sign that the ETF is highly liquid too.
 
So there you have it. Four things to check before you invest in ETFs.
 
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