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How to pick the best ETFs to invest in

by , 30 July 2015

Exchange traded funds (ETFs) continue to grow in popularity across the world. This as investors see the merits in investing in trackers as opposed to actively managed funds, which have a tendency to underperform over the long-term.

So what should you look for when investing in ETFs? What factors indicate a good ETF?

Read on to find out…


Comparing the different ETFs on offer


When it comes to investing in passive funds like ETFs, you may think they’re much of a much. But there are some things you need to look for.

In South Africa, the number of ETFs is growing and there are some ETFs that track the same index. If you look oversees, the number available balloons.

To pick the best ETF on offer, look at the following…


How well does the ETF track its benchmark index?


The whole purpose of ETFs is to track its benchmark index. For instance, an ETF on the JSE’s top 40 should replicate the performance of the top 40 companies.

So the best fund is the one that matches the performance of its benchmark the closest, explains Piper Terrett in Money Week. This means a fund shouldn’t outperform or underperform its index by too great a margin.

If you look at an ETF’s fact sheet, you’ll be able to see how well a fund has tracked its benchmark index over time.


How liquid in the ETF?


Another consideration is the liquidity of the ETF you want to buy. This is the size of the spread between the price you can buy an ETF at and the price you can sell an ETF at.

You want to buy the ETFs with the tightest spreads as this indicates they’re the most liquid.

So there you have it. How to pick the best ETFs to invest in.

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How to pick the best ETFs to invest in
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