We’re finally ready for…
I’ll walk you into the ETF world by simulating the decision making process to pick an ETF based on an index I want to track, which is S&P500. I’ll take screenshots from JustETF, my preferred online ETF browse tool.
I recommend you to take a look at their how-to page for an overview of geographic markets, indexes, capitalization categories and sectors.
As soon as you get familiar with the tool you can go and browse ETFs with the ETF Screener
ETF Features you should care about
The stock index you want to track. For our simulation S&P500.
My search returned 15 results, great. Note: your search may return different results. JustETF asks you to define your fiscal country and shows you only ETFs available for you.
So far, so good.
- Lower ask/bid spread: small volume means few people trading fund shares. You want to sell today? Maybe you need to wait or accept a sell price significantly lower than the market. Want to buy? Higher than the market. That is called spread.
- Lower costs: costs for handling more assets don’t scale linearly.
- better replication: we’ll discuss this later.
- Less risks: it’s rare a large and solid fund goes bankrupt or disappear without consequences.
So, let’s set our filter to catch Large funds:
Eight ETFs are still available.
Total Expense Ratio (TER)
We’ve previously discussed the importance of fees and how they exponentially compound over the years. TER summarizes yearly operating costs for the ETF, expressed in percentage of fund size. Usually in the range of 0-1%. Beware of funds with TER greater than 1% and in general, the smaller the better.
TER is an important factor to minimize but don’t micro-optimize for it. A difference of 10 basis points between two TERs might be swiped away by other factors like tax efficiency.
These are our 8 surviving funds sorted by increasing TER:
(continue on next page)