Your ETF checklist: factors to consider when choosing and comparing ETFs

Key considerations:

• What is the fund’s investment objective? Is it a passive or actively managed strategy?
• If the ETF aims to track an index, what is the index methodology? For example, is it weighted by market capitalisation, fundamentally weighted, equal-weighted, or rules-based?
• How often is the index rebalanced? If an index is frequently rebalanced, the decision to add or remove holdings can change market exposure and potentially increase trading costs, which may have an impact on investors’ returns.
• Where is the fund domiciled? For Australian investors, funds domiciled in the U.S. can incur additional paperwork and tax implications.
• What is the fund’s total assets under management?
• What’s the difference between the fund’s return and the index’s return over time?
• How volatile have the fund’s returns been over time?
• What risks are involved with an investment in the fund?

Key considerations:

What asset class do you want exposure to? Options include:

• • Australian equities
  • international equities
  • commodities
  • currency
  • hybrids
  • fixed income
  • multi-asset, all-in-one diversified funds

Key considerations:

Which particular regions or countries does the ETF give exposure to? For example, an international ETF could aim to track:

Key considerations:

How sector-concentrated is the ETF’s index?

For example, due to the current composition of the S&P/ASX 200, any fund tracking this index will be heavily weighted towards the financial and resources sectors, compared to, for example, the NASDAQ-100, which has a significant allocation to information technology.

Note – if you are looking for exposure to a specific industry sector, there are ETFs that aim to track a benchmark index for a particular sector, for example, financial services, healthcare, or energy.

Key considerations:

• What are the fund’s top holdings?
• Does the index and ETF report holdings daily, or less frequently, which may be the case for actively managed funds?

Key considerations:

• What are the management costs of the ETF?
• Do you need to consider historical capital gains of the fund?
• What is the ETF’s true cost of ownership, considering factors such as management costs, bid-offer spreads, and brokerage costs?

Key considerations:

• Does the ETF pay distributions?
• Do you prefer to take your distributions in cash, or reinvest them in the ETF by participating in a distribution reinvestment plan (DRP), if available?