How to choose ETF fund

ETF фонд

ETF funds have recently become an attractive target for investment, which allows to diversify risks and to invest in a certain asset class around the world (e.g., cattle or biotechnology). Stock selection for investing is simple — to perform the work of the company on the chart history, assess your current financial statements and future prospects of the product in the short and long term. To choose an ETF is more complicated, because the fund invests in many different assets, because the fund in different time intervals may be different. We will give only general recommendations on how to choose ETF fund, the individual parameters you define for yourself.

Selection criteria of ETF fund

ETF-funds are available on any exchange, ranging from USA, to China (in Russia for private investors are available from the same organization — mutual funds). All of them are individual, but the general criteria for determining a reliable fund are identical.

  1. Country risk

This criterion should be the starting point for selection. It includes political, economic, currency and sovereign risks. Any of these components can significantly affect the overall risk of investing money. Country ranking is determined by the rating agencies, but can be changed. If you have already invested money and reduced the country’s rating, it may be a signal of exit from the fund.

Especially important to assess the currency risk as the ETF funds do not insure it due to unprofitability. By the way, incorrect assessment of the country risk of European countries caused the bankruptcy of MF Global and investment company was confident in the firmness of European bonds, which fell with the onset of the 2008 crisis.

  1. The base index

The base index is the index underlying the ETF Fund. If it is based on an index which is known and easy to track – it is a big plus. We are talking about investing in a trend known assets (of the company) or in a sectoral. It is logical that the work of the ETF Fund with the “blue” chips easier to track than investments in companies involved in the development of water purification units.

ETF funds for russian investors

  1. Valuation and prospects

Here we are talking about the prospects of a particular country. On the one hand, the market of developed countries is understandable and predictable, but the assets of developed countries are at the peak, followed by a reversal. On the other hand, it is the developing countries in 2017 will be the most promising, but due to political (legislative, economic) risks of the behavior of quotations will be less predictable.

  1. Cost

Here everything is clear. The less expenses from the ETF fund, the more attractive. However, if the fund with higher costs gives a relatively big profit then it is better to choose it. Because costs are always associated with the profitability and the risk (the higher the profit, the higher the risk). And that is the ultimate level of cost ratio, risk and return each investor determines for themselves individually.

  1. Total assets

The smaller the total assets of the fund, the less liquidity, the less interest it has from investors. As practice shows, investors are interested in stock funds with assets of over $ 1 million, paper funds with assets less than 1 million have a wide spread. The size of total assets leads to the following criterion and trading volume. The bigger they are, the more liquid the securities of the fund. However, there are also exceptions. The most risky are the venture capital investments. If the fund invests in a venture project, it is logical that not every investor will dare to buy shares of the ETF. But that venture projects perform 100% and more returns. So not always liquidity is the main indicator.

Summary. ETF funds have more complex approaches to the analysis, however, refer to less risky compared to direct investment in securities or similar assets. You can invest through a broker, buying shares of the ETF on the exchange. The main selection parameters — liquidity, low spread and your risk appetite.

About the author

JOIN THE DISCUSSION