How to choose which Exchange Traded Fund (ETF) to Invest in?

How to choose which Exchange Traded Fund to Invest in

Deciding which investments are the right ones for you is not a one size fits all situation. It really comes down to quite a few different variables including what your investment goal is, how long you have to achieve it and the kind of risk you are willing to accept in the journey to get there. Some people are perfectly happy to invest in just one Exchange Traded Fund (ETF), and to contribute to that ETF a little bit each month. Others may want to have a few different ETFs in their portfolio that can offer up different benefits and levels of diversification.

The good news is that once you’ve got an idea of what this could mean for you, there are a lot of options for you to choose from. Here are some factors to consider when you are looking to invest in ETFs.

Cost and Total Expense Ratios

Unlike individual shares, ETFs involve a little bit of management which is done by the company which manages them. Depending on the strategy of a particular ETF this could mean regular adjustments to the kinds of shares inside them (this is called the constituents), and how much of them there is (this is called the weighting). It’s for this reason that each ETF has a specific Total Expense Ratio (TER) which is the cost that comes with operating an ETF portfolio. These costs include the management fees and costs of the issuing company. The TER is included in price of the ETF and is not paid directly by the investor.

As a few different ETFs could follow similar themes, looking at the TER of each may help guide your decision on which would be more suited to your portfolio. These fees add up, the difference between a TER of 0.1% and a TER of 0.5% on an investment of R100 000 that yields 10% per year over twenty years is +-R46 460. So keep these in mind when making your selection.

Factsheets and Research

Each ETF comes with different characteristics and a unique strategy for what it seeks to achieve. Understanding what these are, may give you a better idea as to whether an ETF could be a good fit for your portfolio. There’s a whole bunch of this information, including what’s inside an ETF, how it has performed over time and what its strategy is, included in an ETF factsheet, something you can find really easily by simply running a Google Search.

If you’re looking to go a little deeper into ETFs, and want to understand a bit about which categories they fit into and how they compare to others which are similar, there is also a lot of research to read up on. Intellidex, a top notch South African research and media company, provides regular notes and ETF research on EasyEquities.

Local and Global ETFs

Because ETFs enable you to invest in companies like McDonalds, Facebook or Apple without having to actually take your money offshore and pay in Dollars, international ETFs are proving to be really popular with local investors. This also provides another level of diversification, which is helpful when there is any political turbulence that could effect the markets in South Africa or if the growth of those markets is slow.