The ETF Buyer's Guide

Quote

“Surround yourself with people whose yesterday is your tomorrow.” - Dave Kline

ETF Buyer’s Guide

There are over 3,000 ETFs in the US.

All are begging for your precious dollars, with the promise of however much you put in only going up in valve.

Take away all of the marketing and fancy talk, and which are worth your money?

Here is a seven step checklist to run through with any ETF and decide if it is a good investment.

I’ve broken these rules myself and lost money in the process. Thanks, ARK *cough cough.*

#1 Expense Ratio

An expense ratio is an annual fee charged to investors used to cover operating and administrative expenses of ETFs. Remember, that the expense ratio is purely the cost to own the fund. Any other costs associated with your brokerage such as transaction fees are not included in this.

(You know that my favorite ETF provider is Vanguard as they offer a wide range of funds with some of the lowest expense ratios around.)

What To Look For:

• Passively managed funds typically have an expense ratio of 0.02%-0.2%.

• Actively managed fund average 0.5%-0.75%.

#2 Holdings and Weighting:

When you were a kid you didn’t buy a box of crayons without seeing how many good colors were in the box.

As an adult, you shouldn’t buy an ETF without knowing what stocks are held inside the fund. Bonus points here if you take a look at sector allocation as well.

What To Look For:

• Examine the individual assets within the ETF and their weightings.

• Consider diversification across sectors, industries, and geographies.

#3 Historical Performance:

This is where a fund puts their money where their mouth is.

After confirming an ETF has a reasonable expense ratio, good volume, and respectable AUM, look at the average annual return (and also note its inception date).

What To Look For:

• Analyze the ETF's performance over different time frames (e.g., 1-year, 5-year, 10-year).

• Compare the ETF's performance against its benchmark index and peers.

#4 Dividend Yield and Distribution Frequency:

To start this section. Never pick a fund based on its dividend alone. 

Many ETFs have complicated investing strategies that involve leverage or options to increase dividend yields. All of these funds have a tradeoff though so make sure to analyze them against other items on this checklist.

What To Look For:

• Look at the dividend strategy of the ETF and how often distributions are made (monthly, quarterly, etc.).

• Consider whether dividends are reinvested or paid out.

#5 Liquidity and Average Trading Volume:

How many shares are being traded each day? This is important to take a glance at to make sure you will not have any issues exiting positions due to low demand from other buyers and sellers.

Most major providers like Vanguard, Invesco, State Street Global Advisors, Fidelity, Schwab, etc. will have plenty of volume. ETFs by lesser-known providers often have less volume since they lack a consistent track record.

What To Look For:

• Average daily volume >$100K.

#6 Assets Under Management (AUM):

Assets under management is the overall dollar amount of capital that is managed by a company on behalf of its clients.

This quality is important as it is another indicator, similar to volume, of the liquidity of an ETF. A higher AUM indicates investor confidence and typically provides better liquidity. Smaller ETFs with low AUM may face risks of closure.

What To Look For:

• Check that the AUM of an ETF is not 50% lower than other ETFs in the same category.

#7 Tracking Error:

When looking at ETF performance you will often see “ETF market price” and the “underlying price.” A small difference between these is a good sign as it shows the fund has a small tracking error.

What To Look For:

• Evaluate how closely the ETF tracks its underlying index. A lower tracking error indicates better alignment with the benchmark index.

Conclusion

Next time you are about to buy a new ETF hopefully you remember the items on this checklist.

There are a lot of good funds out there, but some are not all they are cracked up to be once you do a little digging.

Appreciate you being a reader! If you found this helpful share it with a friend who would appreciate some extra ETF knowledge.

See you in the next one. ~ Cade

Chump Change Picks

A Few Ideas And Short Stories - Morgan Housel is one of my favorite writers. In this post he breaks down his thoughts on a few different stories where the lessons can be applied to investing, business, and life in general. The man just has a way of thinking deeper than most.

We Are Going Into A Recession - Random video I stumbled across that does a fantastic job of stating the market stats right now. It’s bland, but better than the clickbait “world is ending” type videos that get all the attention. I’ll let you make you own opinion on if a recession is coming…

Joseph Carlson Video On Google - Solid video here breaking down the bull case for Google and why it may eventually recover. Not financial advice, but I’m watching this stock right now.

Best Memes

Crypto bros can’t ever catch a break…and most of it is deserved.

Bottom guy definitely buys $VTI.

Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email don’t hesitate to send me a reply.