Researching ETFs


(Jeff puckering) #1

As I am expecting my portfolio to contain 90% plus ETFs And have been looking into how best to pick them and what kind of allocation I want for my risk appetite and saving goals.

I have found a couple articles helpful,

https://www.google.co.uk/amp/s/amp.businessinsider.com/guide-to-how-etfs-work-2018-1

https://www.investopedia.com/articles/exchangetradedfunds/11/building-an-etf-portfolio.asp

For those more experienced than I, what resources do people use to evaluate ETFs?

It would also be interesting to know what kinds of allocation mix people have (And more importantly rational) and if you use any tools to monitor the mix over time.


(Tommy Lowe) #2

Check out Morningstar as well, here’s an example for $VUSD.

http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0000WA5P


(Donald Philp) #3

@Jeff This is a very tricky question but let me try and break it down for you in two ways, technically driven and advice-driven:

  1. Technically driven

1.1) Cost - the benefits of actively or passively managed ETFs is cost. I would check the TIC, Total Investment Cost. This is the TER + trading costs. (Morningstar has TIC costs as we pull allot of their data). The reason for not checking the TER ratio as much anymore, is because allot of funds end up trying to beat their benchmark, underlining asset, and end up spending allot on trading costs through short-term gains. So TIC is very important.

1.2) Liquidity - As an ETF is really a derivative of an underlining asset. IE it’s a listed fund that “copies” eg the S&P 500. It is very important to choose the right provider. ETF are known for tracking error, eg (and stop me if im getting too technical) as a ETF is only an underlining instrument it tracks an actual instrument or underlining asset over long periods of time. Sometimes this tracking might be out by some percentage on the negative, this can be caused by a number of issues. The most important thing that you have to remember is that choose an ETF that is liquid and has a good market maker. Generally, the bigger firms have this pretty much covered. However, I would be hesitant at let’s say bio-engineering or biotech as an example as I would need to check the market makers before I buy. The underlining companies within biotech, for example, is very small compared to say a mining ETF. So I would keep this in mind

  1. Advice Driven

2.1) Risk - ETFs are a cheap way to spread your risks without consulting an independent financial advisor. I would stick to the basics and not try and purchase any fancy ETFs. S&P, NASDAQ, MSCI World index, these are all very good counters if you end up doing allot of your own stock picking. There are only 3 rules when it comes to risk, and trust me I have seen allot of people lose billions of dollars overnight…the 3 rules are:

  1. Diversify
  2. Diversify
  3. Diversify

2.2) Remember picking ETFs is a completely different approach. You are now doing asset allocation instead of stock picking. IE you choose your currency, location, sector etc. This might be, in the end, the best way for anyone starting to invest; as they don’t immediately start with single stock exposure.

My 2 cents, I hope that helped


#4

Check out JustETF. I’ve found it to be an invaluable resource. This article is well worth a read too: https://www.justetf.com/uk/academy/make-the-right-etf-selection.html


(Justin T) #5

Info around dividends also interesting surrounding ETFs. Not too many vendors or websites accurately detail ETFs distributions - before payment.

Just a thought.


(Jeff puckering) #6

Thanks for the detailed response @chonkie, my only immediate question is about liquidity, are some ETFs difficult to sell quickly? I, maybe naively, assumed they would be able to sell instantly (or as long as it takes for the transaction to clear).

And if there is one thing that has been drilled into my head spending time on this forum is diversification! I want to try and build a list of sectors, geographies, industries etc that I want exposure of and try to get a good mix within each so all of this is helping.

@christopher a quick look at that justetf page looks very interesting, as soon as I have more than 5 minutes I will be creating an account and seeing what more it can do thanks for the tip