How to choose an ETF: 6 important factors to consider

When you want to invest in a specific asset class, theme or sector, ETFs offer two major advantages: a broad diversification and low management fees.

Don’t look for the needle in the haystack. Just buy the haystack.

– John C. Bogle

An ETF is a basket of securities designed to replicate the return of an underlying index. Here are the main selection criteria:

Underlying Index

The first step is to choose the index the ETF aims to replicate. To ensure good diversification, the index itself must be well diversified.

Replication Method

The two main replication methods are physical replication (where the securities making up the index are bought) and synthetic replication (where the index return is tracked via derivatives). We recommend using ETFs with physical replication.

Sometimes, full replication is difficult to achieve. For example, in the case of a bond index, it may not possible to buy all the bonds. In such cases, the ETF manager will use a sampling method to buy a representative sample of the bonds that make up the index.  

Ongoing Charges

A major advantage of ETFs is their reduced cost compared to investment funds. The TER (Total Expense Ratio) gives you an idea of ​​an ETF’s ongoing charges. This figure appears on the fact sheet and should not exceed 0.3% for an index that is simple to replicate because it is stable and liquid.

Performance

A quality ETF should track the performance of its underlying index as closely as possible, especially if full physical replication is used.

Assets under Management

ETF assets under management should be at least 100 million. Below this threshold, there is a risk of a relatively high bid-ask spread. This spread should ideally be less than 0.10% on average.

Issuer

Invest with a manager who has a good reputation, experience, and track record.