How to choose your ETF – by TradingBrokersView Experts

Michael Turner
July 20, 2022

Picking the right exchange-traded fund, or ETF, can be tricky.

To pick the right ETF, the very first question to answer is what asset class, and more specifically, which underlying index should the ETF of your choice track.

Your investment objectives and asset allocation will dictate the answer.

Selecting the asset class

Exchange-traded funds (ETFs) can represent different asset classes: stocks, real estate investment trusts (REITs), bonds, commodities or forex.

Most diversified portfolios will have investments in stocks and bonds. Commodity and forex ETFs are rather speculative in nature and not all portfolios include them.

Selecting the index

ETFs have a geographical focus.

For example, ETFs that track the MSCI ACWI Index cover equities worldwide, while ETFs tracking the S&P500 index cover only US companies.

The index your ETF tracks might not only follow a geographical focus.

For example, the Russell 2000 index is tilted towards smaller companies, while the S&P500 is dominated by large and mega-cap companies.

All the above indexes will give you a broad market exposure, but you might prefer ones that give you exposure to only one sector of the economy. Read more about sector ETFs here.

Ultimately, your investment strategy will decide which indexes you want to incorporate in your portfolio.

Future performance will largely depend on how the index fares, so there’s a great deal of uncertainty about which index is better to own at any given time.

Nevetheless, some general guidelines can help if you’re unsure. For example, for most beginner investors, a high degree of diversification is often recommended. So for example, an investor seeking exposure to US markets may favor an S&P500 index over the Dow Jones industrial average, as the latter only covers 30 companies. Furthermore, including both the S&P500 and a Dow30 ETF would result in some overlap.

Once you have selected the underlying index, it’s time to use a screener tool to identify which ETFs you can choose that track the index in question and how they compare. Let’s go through the main aspects you should consider.

Expense ratio

The expense ratio or total expense ratio (TER) measures the annual charge you’ll need to pay to the ETF issuer for holding the ETF. This is not deducted from your account but is rather reflected in the price of the ETF on a daily basis.

Key Factors to Consider When Choosing an ETF

Understanding Expense Ratios

An expense ratio represents the annual cost of holding an ETF. For example, a 0.20% fee means that for every $10,000 invested, you pay $20 per year.

Is that expensive? It depends. For ETFs that track major indexes like the S&P 500, a 0.20% fee is generally considered slightly above average. However, for more niche or sector-focused ETFs (such as healthcare or thematic funds), that same fee can actually be quite competitive.

If you’re investing long term, fees matter a lot. A high expense ratio—especially 1% or more—can significantly reduce your returns over time due to compounding. When comparing ETFs tracking the same index, it almost always makes sense to choose the one with the lower cost.

ETF Currency Considerations

The currency of an ETF doesn’t always match the currency of its underlying assets. In many cases, choosing an ETF denominated in your local currency can help you avoid conversion fees.

For example, UK-based investors may opt for GBP-denominated ETFs that still track U.S. markets, helping them minimize currency exchange costs.

Liquidity and Trading Volume

Liquidity is an important factor when selecting an ETF. Funds that trade on major exchanges with high daily volume tend to offer tighter bid-ask spreads, making them more cost-efficient to buy and sell.

In general, higher trading volume = easier execution and lower hidden costs.

Tax Domicile Matters

The country where an ETF is domiciled can impact both availability and taxation.

Some U.S.-domiciled ETFs are not accessible to EU investors
Non-U.S. investors may prefer non-U.S.-domiciled ETFs to avoid U.S. estate taxes
Certain jurisdictions (like Ireland or Luxembourg) offer tax advantages, such as reduced withholding taxes for specific investors (e.g., UK residents)

Choosing the right domicile can have a meaningful impact on your net returns.

Dividend Treatment: Accumulating vs Distributing

ETFs handle income differently, and your choice should align with your investment goals:

Accumulating ETFs: Automatically reinvest dividends back into the fund, helping compound returns without extra transaction costs
Distributing ETFs: Pay out dividends periodically, which can be useful if you rely on regular income

What Else Should You Know About ETFs?

If you want to go deeper before selecting the right ETF, here are some useful areas to explore:

Differences between mutual funds and ETFs
What an ETF portfolio looks like
How to start investing in ETFs
Buying ETFs from major providers like Vanguard or iShares
Understanding sector and thematic ETFs
Basics of passive investing
Availability of U.S. ETFs for international investors
How expense ratios impact performance
Currency exposure in ETFs
Emerging trends like Metaverse-focused ETFs

How to choose your ETF – by TradingBrokersView Experts

Selecting the asset class

Selecting the index

Expense ratio

Key Factors to Consider When Choosing an ETF

Understanding Expense Ratios

ETF Currency Considerations

Liquidity and Trading Volume

Tax Domicile Matters

Dividend Treatment: Accumulating vs Distributing

What Else Should You Know About ETFs?

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