How to choose an ETF, example 2
31 October 2021
Criteria for choosing ETFs and ETCs
31 October 2021
So, you have seen the many elements that you need to evaluate when researching a particular ETF. At this point, most of you will find it all very complicated, without having the slightest idea of where to go to do such research. This is to be expected, at least initially. Researching an ETF is a long process that requires patience and a lot of attention. After all, you are looking for a financial instrument through which to invest your savings (and I assume you care about your savings).
When you go to buy a pair of shoes, for example, I don't think you go into the store, grab the first box you find and after paying, go home satisfied. You choose the model, the colour, the size, you try them on to feel how they fit on your feet... in short, you dedicate the necessary time to the purchase. The same goes for choosing the right ETF or ETFs for your investment idea.
However, on the internet, there are several screeners (literally, sifters) that can help you in your search for ETFs and that allow you to select different parameters. However, I must point something out here. Currently, for those who live outside the United States, it is not possible to buy ETFs listed in New York (at least not most of them). Therefore, trying to make a search using an American screener (like etf.com or etfdb.com) is totally useless, because it has a database of only American ETFs which you cannot buy.
You need to use a screener that searches through all ETFs listed in Europe (London, Frankfurt, Amsterdam, Milan, etc). I will now show you an example of what you need to do. I will use the screener from JustETF (https://www.justetf.com/it/find-etf.html). On this site, on the left, you can select the parameters (out of the available ones).
Important! In "ETF Listing" you have to click on "Show all listings" so that you can see all listed ETFs in the results, otherwise, the screener will limit the search to the default exchange, i.e. the London exchange.
Let's say my goal is to invest in the US stock market whilst diversifying. So, I want an ETF that is heavily traded (liquid), with physical replication, low TER, no currency exchange issues, accumulates dividends and has a longevity of at least 5 years.
I proceed with my research.
You can't select all the variables but it's not a big deal, the search will just take a little longer. I have selected as a geographical area the United States. I want an ETF that is similar to SPY which, because it is listed on the New York Stock Exchange, I can't buy it as an Italian citizen and since I don't want to worry about the exchange rate, my choice has to be in Euros (EUR) or Euro hedged. EUR Hedged means, as you have seen before, that the ETF contains within it a mechanism, realized through derivative contracts, that cancels the exchange rate risk.
The other characteristics I am looking for are: a well-capitalized ETF (so liquid), that has physical replication, low costs (so a maximum TER of 0.20%), that accumulates dividends and that has been listed for at least 5 years.
Below is the result of my research.
With only the choice of the United States, the search returns 245 ETFs. I personally prefer to go and look at the various ETFs myself, not making the screener do it for me, but this is a personal choice. What I need to do next is click on "Fund Size (in m €)" to put the ETFs in order of capitalisation.
Now, given the number of ETFs there are, I have to select all of the ones with a capitalization of at least 1 billion and that are EUR or EUR hedged. This reduces the list to just 8 ETFs:
- iShares S&P 500 EUR Hedged UCITS ETF (Acc)
- Amundi Index MSCI USA SRI UCITS ETF DR (C)
- Lyxor S&P 500 UCITS ETF - Dist (EUR)
- Amundi S&P 500 UCITS ETF EUR (C)
- Amundi S&P 500 UCITS ETF Daily Hedged EUR (C)
- Lyxor Nasdaq-100 UCITS ETF - Acc
- BNP Paribas Easy S&P 500 UCITS ETF EUR
- UBS ETF (IE) MSCI USA hedged EUR UCITS ETF (EUR) A-acc
My selection is not finished yet, I need to check the other parameters. To do this I click on the name of each ETF. From the list above I discard Lyxor Nasdaq-100 UCITS ETF - Acc because it replicates the performance of Nasdaq 100 stocks (another American stock market index). I'm also eliminating Lyxor S&P 500 UCITS ETF - Dist (EUR) because it has both synthetic replication and dividend distribution. Also eliminated are Amundi S&P 500 UCITS ETF EUR (C), Amundi S&P 500 UCITS ETF Daily Hedged EUR (C) and BNP Paribas Easy S&P 500 UCITS ETF EUR which have synthetic replication.
The list has already been whittled down to three ETFs:
- iShares S&P 500 EUR Hedged UCITS ETF (Acc)
- Amundi Index MSCI USA SRI UCITS ETF DR (C)
- UBS ETF (IE) MSCI USA hedged EUR UCITS ETF (EUR) A-acc
All three have a very similar TER, Amundi 0.18%, UBS 0.19% and iShares 0.20%. The last parameter is longevity. UBS ETF (IE) MSCI USA hedged EUR UCITS ETF (EUR) A-acc is eliminated having been on the market for just over 2 years (June 2019). So is Amundi Index MSCI USA SRI UCITS ETF DR (C) which has longevity of three years (September 2018).
So, my choice falls on iShares S&P 500 EUR Hedged UCITS ETF (Acc) which has all the features I'm looking for (and also, as an Italian, is listed on the Milan Stock Exchange).
As I have mentioned, by clicking on the names you can see all the most crucial features, such as the list of all the stocks that make up the ETF - although, in this case, it is not as useful to know the names (them being the 500 companies present in the S&P 500 index), as it is to know their weight within the basket - and the percentage of the individual sectors within the ETF. You can also download the fact sheet and the KIID.
Alternatively, just do a Google search of the ETF name and then go and look at the features directly on the issuing company's website (I personally do this).
So, you have seen an example of how you might choose the correct ETF for your investment idea. In this case on equities. Below I will show you two more examples, one for bonds and one for an ETC on gold.
At this point, most of you will find it all very complicated, without having the slightest idea of where to go to do such research. This is to be expected, at least initially. Researching an ETF is a long process that
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
