How to choose an ETF?

How to choose an ETF?

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Just like other investments, choosing an ETF depends on your required asset allocation, financial goal, risk preference and time horizon. Choosing an ETF depends on what kind of asset allocation you want to achieve in your portfolio by adding the ETF to it since ETFs are available for different kinds of asset classes like equities, bods, real estate, commodities. First decide on the asset class for the ETF.

Decide on the kind of diversification you want to achieve and the index you want to track. An ETF tracking a broad market index is suitable for achieving maximum diversification with lowest risk. If you’re willing to take risk and want exposure to niche market segments, sectors or countries, choose a specific ETF.

Look at the ETF’s portfolio to understand the exposure it will give you. Picks ETFs with lower tracking error within the asset class and market segment you want to follow. Avoid thinly traded ETFs as they’ve wider bid/ask spreads and will increase your trading costs, lowering the returns from your ETF. ETFs tracking narrow market segments or having lower levels of assets (AUM) tend be less liquid and trade at a price that is not in line with their underlying NAV. Look for ETFs that tend to trade close to their NAVs.

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