ETF 101

We’re finally ready for…

ETF 101

JustETF

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

Tracked index

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.

Fund Size

Fund size tells you the total value of the assets owned by the fund. While a large size is not optimal for Mutual Funds, it is very welcome for ETFs for the following reasons:

  1. 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.
  2. Lower costs: costs for handling more assets don’t scale linearly.
  3. better replication: we’ll discuss this later.
  4. 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)

8 comments

  1. I’m very happy that investing series are back 🙂 As always, I’ve learned few new things and I thank you for sharing it with us. Really looking forward to IB 101 😉

  2. Hi Mr. RIP,

    Here one guy also trying to reach the FI, baby steps at the moment :). It’s really a pleasure to read your blog :). I also live in Switzerland and there are not so many blogs out there speaking about financial swiss topics (or at least not in English :D), like taxes.

    What’s your point of view on DGI investing from Switzerland?

    As I am building my portfolio based on that philosophy. Since I moved to Switzerland, I think it has less advantages compared to ETFs, due to the fact that in Switzerland there is no taxation on capital gains, while for dividends you pay taxes.

    When I lived in an UE country with tax on capital gains, I didn’t see the taxes on dividends as a huge disadvantage for the strategy, as anyway I would be taxed when I wanted some cash back, for supporting my living when I would be no longer working, not the case in Switzerland.

    I tend to think that, for a fiscal resident in Switzerland, dividend growth stocks are good for recession times, when at least you can, more or less, rely on your continuous stream of money. But, while in a country with taxation on capital gains by selling your stocks I would allocate most of my portfolio on DGI strategy, maybe in Switzerland I would keep an small amount, seen as a “recession proof” part of the portfolio.

    Thanks!, and really happy about your investment series!

    1. :o, I hadn’t read pages 3 and 4 when posting the comment ?

      This clarifies a lot and destroys my ideal view of non-tax on ETFs in Switzerland ?

  3. Great article! I’m looking forward to the next one about IB. I wanna know if IB is good for people with little income for investing?

    1. If you go directly with IB they charge (10$ minus paid fees) per month. And their fees are very low. If you hold more then 100k in the account, there are no minimum fees. I opened account with IB trough “proxy”, which means I have lower minimum fees, but each trade is associated with higher costs. Works well for buy and hold 🙂 but not suitable for daily traiders.

      Mr. Rip: everthing ok? I’ve notice it is almost the middle of the month and no mothly update so far. Hopefully, you’re just superbusy with the wedding ceremony 🙂

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