How to pick & choose ASX ETFs

Did you know there are over 200 Exchange Traded Funds or ETFs on the Australian sharemarket?!

And there are more joining each and every month?

In years to come, we think the industry will be far bigger and more sophisticated than it is today.

Unfortunately, it might get worse before it gets better because we think the industry will reach a natural 'tipping point', when there are too many ETFs. Some will fail.

Now, a 'failed' ETF is not the end of the world. But if we were given the choice, it's far easier (financially and psychologically) to pick the right ETF the first time around and not have to worry about what happens if your ETF closes its doors.

In this brief tutorial, we take you through what we look for when picking ETFs. If you're an absolute beginner, please visit our free education pages on Index Funds and ETFs.

What To Look For In an ETF

1. Strategy & Exposure

Know what you own and why you own it. As we said, there are hundreds of ETFs. There are many markets (shares, property, bonds, cash, etc.). Then, there are many countries. Plus, there are thousands of individual shares and almost as many managed funds. Finally, there are many ETFs and funds that claim to do the same thing.

So which one is right?

Knowing what's right for an investment portfolio is no easy task. But, we think the easiest place to start is knowing what you want from your investment.

Is it long-term (10+ years) growth? Then shares -- which are riskier -- might be the right choice. Buying a cash ETF for long-term growth is probably not the greatest idea.

However, if you are investing for a shorter period of time (e.g. less than 3 years), chances are, preservation/protection of your money is probably most important, so cash or bond ETFs and funds might be the way to go.

Once you know which type of investment you want to make (higher-risk growth, income, low-risk capital protection, etc.) it's time to compare your options.

Look at a list of all of your options (e.g. all of the ETFs, index funds, managed funds, etc.) that provide what you're looking for. Then, keep reading below...

2. Issuer

The 'issuer' of the ETF is the company responsible for marketing or 'offering' the ETF/fund to you. Typically, the name of the company which issues the ETF is found in the name.

For example, the issuer of the Vanguard Australian Shares ETF (ASX: VAS) is... drum roll, please... Vanguard!

The issuer of the iShares Core S&P/ASX 200 ETF (ASX: IOZ) is iShares (which is owned by BlackRock).

Why do we focus on the issuer? 

The issuer of the ETF has ultimate control of the future of that ETF. So if the issuer fails, goes bankrupt or makes a mistake, there's a chance something could happen to the ETF (e.g. it could be closed).

While it's extremely unlikely that an ETF issuer will close its doors, we think the biggest and most reputable ETF issuers often have the most efficient ETFs and sustainable business models - so we always start with them.

3. Size

The size of the ETF is important to consider because ETFs cost money to run. Remember, you'll pay a fee for investing in an ETF and that fee is in place to cover the costs of providing that ETF to investors.

If a low-cost ETF has below $100 million or the ETF is being offered by an Issuer who is losing money on their ETF business, we would rather not invest in that ETF.

4. Fees & Costs

Fees are one of the only things you can control.

Fortunately, since the market for ETFs, index funds and managed funds are becoming more and more competitive, fees are coming down.

The management fee or "MER" is the fee for investing and obviously, the lower the better.

However, fees are only one part of the research process, so don't overlook a better ETF simply because it charges a tiny bit more in fees.

5. Performance & Risks

Risks need to be considered at both the ETF or fund level and at the portfolio level (e.g. ask yourself 'how much do I have invested in shares versus bonds?').

We always consider risks for the ETF, provide commentary around how that ETF might fit in a portfolio and the risks associated with the sector more broadly (e.g. which risks apply to ETFs in the Australian shares sector).

When it comes to performance, we'll consider the ETF or fund against its own benchmark, against its peer group and against some alternatives.

We evaluate the ETF's ability to deliver the returns we expect for an ETF/fund in that sector and at the portfolio level (e.g. if it's a growth investment we might ask 'is XYZ ETF better than ABC ETF from a different sector?').

We like to see an actual track record -- that is, not a 'backtest' or 'hypothetical portfolio' -- with 3+ years of trading history.

But no matter how long the track record, we're mindful that past performance is not indicative of future performance.

Note: you should always consult a licensed and trusted financial adviser before doing anything. This information is factual information and should not be considered financial advice.

What Now?

Again, there are thousands of ways to invest your money. We only need to find a few investments to make it a success, so we consider each investment against all others and only consider buying into the investments which we believe are truly the best of the bests.

Complete list of Aussie ETFs