This article is produced in partnership with FSMOne.com.
So you have heard about the wonderful advantages of investing in Exchange Traded Funds (ETFs). ETFs provide us a low-cost and simple way to create a diversified investment portfolio. Yet, with thousands of ETFs to choose from, how do we go about selecting the right ETF?
Here are three simple steps in helping you find the perfect ETF.
Step One:The Big Picture
Firstly, you must have an idea of what underlying asset are you interested to invest in? As an ETF is a fund, this means that it can invest in multiple types of securities. For example, you can choose between investing in ETFs that hold equity, fixed income or even gaining exposure into a niche sector. For example, there is an ETF, named as The Obesity ETF (SLIM), that focused on investing in companies that are fighting the obesity epidemic. Thus, you can use ETFs to target not just a specific market but also trends you are seeing in the economy.
FSMOne ETF Focus List is a great starting point for investors to start investing in ETFs. The list has already screened out and highlighted some of the more interesting ETFs for us to research on.
By looking through the categories you are interested in, you will be able to see the suggested ETFs that can be considered for investment.
Step Two: Research On What You Are Buying
By clicking on the ETF, we can find out more information such as the following.
As ETF is just a fund investing in a myriad of securities, we have to find out what are the actual underlying assets within the ETF. FSMOne.com would show the top 25 holdings of each ETF at the factsheet page.
Source: FSMOne.com, Top 25 Holdings of VANGUARD FTSE EMERGING MARKETS INDEX FUND ETF SHARES
By going through this list, you will get a sense of what are the companies or bonds this ETF is investing in. If you are uncomfortable with the underlying securities that the ETF is investing in, maybe this ETF is not suitable for you.
Size of ETFs (AUM)
One of the first things to take note of an ETF is the liquidity and strength of the fund.
A criteria to check should be the Assets Under Management (AUM) of the fund. You can find that information easily on the top summary section of the ETF factsheet. An ETF with a sizeable AUM would imply that there is ample liquidity for us to invest in it.
Understanding Tracking Error
Although an ETF that we invest in might be tracking the performance of an index, that does not mean it will give us the return exactly how the index behaves. Given that running a fund would involve expenses, the returns that we are getting from an ETF tends to be slightly lower than what the index is showing. This difference is known as the tracking error.
For example, if an ETF has an expense ratio of about 0.1% per year, it might produce a return about 0.1% from what the index reflects. This means that the ETF would have a tracking error of about 0.1%. As a general rule of thumb, we would like a smaller tracking error from an ETF.
Understanding The Cost Structure
Next is finding out the cost structure of the ETF and how much it would cost you yearly to invest in them. All ETFs would have a yearly expense charged to us when we are invested in them. We can find out this figure by looking at the “expense ratio” of an ETF.
The information is readily available by looking at the “Investment Information” section of the factsheet. In this example, an expense ratio of 0.14% will be deducted from our investment every year to maintain the ETF. This means that for every $1,000 invested in the ETF, $1.40 of fees will be deducted from the fund every year. That is a very reasonable amount given that most mutual funds are typically charging annual fees of around 1.0% of our investment.
Adding Some Favour To Your Investment
Apart from selecting ETFs that focuses on specific market or asset classes like equities or bonds, there are niche ETFs that allow us to gain exposure into a particular sector like the Chinese Technology sector or the REITs sector.
By going through the “Tactical Plays” segment of FSMOne’s ETF Focus List, we can select some of these ETFs to help diversify our portfolio.
Step Three: Monitor and Invest
Create Your Watchlist
Now that we have done our research and found the ETFs that we are interested to invest in, it is time to start creating our watchlist. We can easily add the ETFs we liked into our watchlist by clicking on the “Add To Watchlist” function.
By grouping all the ETFs that I am interested in, I would be able to monitor all of them in a quick and easy manner.
I would also be able to add price alerts on these ETFs, so that the system would alert me through email or an app notifications when the ETFs have reached my desired price for when I would like to buy or sell.
In this way, I can continue with my daily routines and do not need to check the prices on a daily basis when I do not have the time.
Time To Pull The Trigger and Invest
Did the system just send you a price alert notification?
Finally! It is time to buy your first ETF. To find out the actual amount you would need when investing in a particular ETF, you can easily calculate the amount within FSMOne.com.
When we are investing in an ETF, we will have to pay for the processing fees in terms of brokerage, stamp duty and other stock exchanges’ related charges (if applicable). A simple way to calculate that is to use theETF Calculator function within FSMOne here.
The calculator will allow you to calculate the transaction cost you would incur when investing in that particular ETF. Today, FSMOne.com is one of the lowest brokerages in town with a processing fee of just 0.08% of the invested amount subject to a minimum of $10. More importantly, unlike most brokerages, you will not be charged any custodian fee for holding on to the ETFs or stocks within the portfolio.
You can easily create your own watchlist and invest in ETFs through a FSMOne account.
Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.