How to choose an ETF, example 1

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 carry out 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 devote the necessary time to the purchase. The same goes for choosing the right ETF or ETFs for your investment idea.

On the internet, however, there are several screeners (literally, sifters) that can help you in your search for ETFs and that allow you to select different parameters. But I must point something out here. Currently, for those who live in the European Union, it is not possible to buy ETFs listed in New York (at least not most of them). Therefore, searching with an American screener (like etf.com or etfdb.com) is completely useless, because its database contains 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/en/find-etf.html). On this site, on the left, you can select the parameters (among 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 while diversifying. So I want an ETF that is heavily traded (liquid), has physical replication, a low TER and no exchange rate issues, accumulates dividends and has been listed for at least 5 years.

I proceed with my search.

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 the United States as the geographical area. I want an ETF similar to SPY which, because it is listed on the New York Stock Exchange, I can’t buy as an Italian citizen, and since I don’t want to worry about the exchange rate, my choice has to be in euro (EUR) or euro-hedged. EUR Hedged means, as you have seen before, that the ETF contains a mechanism, realised through derivative contracts, that greatly reduces the exchange rate risk.

The other characteristics I am looking for are: a well-capitalised ETF (so liquid), with physical replication, low costs (so a maximum TER of 0.20%), that accumulates dividends and has been listed for at least 5 years.

Below is the result of my search.

With only the United States selected, the search returns 245 ETFs. I personally prefer to look at the various ETFs myself rather than have 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 sort the ETFs by capitalisation.

Now, given the number of ETFs, I have to select all those with a capitalisation of at least 1 billion 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 the Nasdaq 100 stocks (another American stock market index). I’m also eliminating Lyxor S&P 500 UCITS ETF – Dist (EUR) because it has synthetic replication and distributes dividends. 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 now 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 how long the ETF has been listed. UBS ETF (IE) MSCI USA hedged EUR UCITS ETF (EUR) A-acc is eliminated because it has been on the market for just over 2 years (June 2019). So is Amundi Index MSCI USA SRI UCITS ETF DR (C), which has been listed for three years (September 2018). These two are not worse ETFs: they simply do not meet the 5-year rule I set for myself.

So, my choice falls on iShares S&P 500 EUR Hedged UCITS ETF (Acc), which has all the features I’m looking for (and which, as an Italian, is also listed on the Milan Stock Exchange). Liquidity is the last thing I check: as explained above, I look at the daily traded value on my broker’s platform.

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, knowing the names, which are the 500 companies in the S&P 500 index, is less useful than knowing 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 search the ETF name on Google and then look at its features directly on the issuer’s website (I personally do this).

So, you have seen an example of how you might choose the right ETF for your investment idea, in this case on equities. Please note that this is an example of the method, not a recommendation to buy this ETF. Next I will show you two more examples, one for bonds and one for an ETC on gold.