There are many, many ETFs available for investing. Lists are long. Just look for the gems there. Your ETFs that have obtained markets (US, Europe, Asia sectors, etc.), have certain sectors (tech determines, healthcare, food, etc.) of certain criteria (sustainable, emerging markets, etc.). In this article we will help you how to choose an ETF.
Choose an ETF in 5 steps
Choosing an ETF can be very difficult, there are thousands! You have trackers that follow certain markets (US, Europe, Asia, etc.), certain sectors (tech, healthcare, etc.) of certain criteria (sustainable, emerging markets, etc.). We have made a simple step-by-step plan that can help you choose an ETF.
The 5 step plan consists of:
- Choose your region. Do you want to follow the global economy of emerging markets?
- Choose a basket in which you want to invest. Do you only want shares, or also bonds? So you choose the type of asset class.
- Choose your industry. Do you want to invest in a specific sector, such as technology or sustainability?
- Choose whether you want a sustainable element.
- Choose whether your perk protectors wilt. Such as protectors against dividend leakage, or an ETF that pays out dividends.
How many ETFs should you own?
A general rule of thumb is that you should also ensure a good spread when investing in ETFs. Spreading your investments is important because you minimize risks.
A rule of thumb can be: Invest in at least three to five different fund ETFs so that you can spread investments across different markets, products and sectors.
Step 1: choose a region
Do you want an ETF that tracks the entire world economy (an all world index)? Or do you want to invest in the Dutch market (the AEX index)? Or do you want to invest in emerging economies (indices of emerging markets)? This will already help you to exclude choices and choose a direction.
Step 2: choose a ‘basket’ in which you want to invest
Do you want to invest in a basket with a few companies (shares), companies and bonds? Or do you want to invest in a basket of companies in the energy sector? Or do you want to invest in a basket of real estate companies? Most ETFs invest your money in stocks, but you may want to invest specifically in an ETF that tracks real estate companies. Just to name one. Therefore, think about the underlying value of the index you want to track.
Step 3: Choose your sector
Sometimes you may have a strong belief in a certain sector, such as ‘renewable energy’ or ‘video gaming’. If you want to invest specifically in one of these and also want some diversification, you can look for an ETF that tracks a theme index. This step is optional.
Step 4: choose whether you want a sustainable element
Sustainability is one way to go! And there are ETFs these days that have a sustainable element. This often makes the ETFs a bit more expensive because they have to be made ‘by hand’, instead of simply tracking an entire index. ETFs that focus on sustainability sometimes want to exclude companies. That sometimes includes the ETF being higher.
Step 5: choose if you want molded protectors
By investing in ETFs, you can take risks such as currency risk of dividend leakage. You have ETFs protecting against this. For example, ETFs at VanEck protect you against dividend leakage.
When you followed these 5 steps and you are ready to start investing, a few more guiding principles to make sure your investment will bring in long term success.
- Make sure you pay attention of the costs. When it comes to investing in ETFs you can have transaction costs (every time you buy the ETF, you do a transition, and this can bring costs) but also fund costs. The fee an ETF house/maker charge for maintaining the ETF. A rule of thumb is that fund fees higher than 0,6/0,7% are too expensive. Ideally, you want these costs as low as possible.
- Dividend. Some ETFs yield dividend and some don’t. At Morningstar.com or yahoofinance.com you can find more information whether you have a dividend yielding ETF. This can be nice to enhance the compound interest effect.