How to choose an ETF: Key metrics and practical tips

Key takeaways:

• To choose an ETF, investors can compare core metrics such as expense ratio, tracking difference, tracking error, liquidity, fund size and fund documentation.
• Expense ratio affects net returns because ongoing costs reduce performance compared with the same ETF before expenses, all else equal.
• Tracking difference and tracking error show how closely an ETF follows its benchmark, with deviations potentially linked to fees, taxes, trading costs or replication methods.
• Liquidity and fund size can affect trading costs, bid-ask spreads and closure risk, although these factors vary by ETF, issuer, venue and market conditions.
• Beyond the numbers, investors should review the KID, exchange listing currency, underlying assets and concentration risk before comparing ETFs.

With thousands of ETFs available on global exchanges, selecting the ETFs that fit your investment goals can feel overwhelming.

Here are key considerations to help you compare ETFs:

Note: Investing involves risk. ETF prices can fall as well as rise, and you may get back less than you invest.

The ETF selection checklist

1. Expense ratio: The fee factor

The expense ratio represents the annual cost of owning an ETF, expressed as a percentage of your investment. This ongoing fee is reflected in the ETF’s net return and reduces returns compared with the same ETF before expenses.

Practical tip: For broad market index ETFs, expense ratios are often lower; comparing similar funds can help assess whether costs are competitive. More specialised ETFs often have higher expense ratios, so comparisons should be made between funds with similar exposure, structure and strategy. A 0.30% fee difference on EUR 100,000 is EUR 300 per year (before any tax effects); over time, lower costs can increase net returns if all else is equal.

2. Tracking difference/error: Understanding deviations

Tracking difference shows how far an ETF’s return has been from its benchmark over a period, while tracking error measures how volatile that difference has been. Lower figures may suggest closer benchmark tracking, but results can vary over time.

Practical tip: Compare the ETF's performance against its benchmark over relevant periods using total return figures where available. Persistent differences relative to the benchmark (beyond fees and expected frictions) may reflect replication methods, trading costs, withholding taxes, securities lending, or index changes.

3. Liquidity: Can you exit when needed?

Liquidity affects how easily an ETF may be bought or sold at or near quoted market prices. Higher liquidity is often associated with tighter bid-ask spreads and lower price impact when trading, although this can change with market conditions and order size.

Practical tip: Bid-ask spread and typical quote size can be practical indicators of trading cost, alongside volume and AUM. Liquidity depends on the ETF, the listing venue, market conditions, and order size. Investors often review AUM, typical bid-ask spreads, and average daily volume as indicators, but there is no universal threshold.

4. Fund size: Is bigger always better?

Larger funds may have advantages, such as deeper secondary-market liquidity, but smaller funds may still serve specific portfolio purposes. The risk of closure or liquidation varies, so investors usually review the fund documentation.

Practical tip: ETFs with lower Assets Under Management (AUM) may have different liquidity/closure characteristics; investors can consider AUM alongside spreads, trading volume, and issuer information. Smaller funds may have higher trading or a greater risk of closure if they do not attract sufficient assets, although this depends on the issuer, market and fund structure.

5. The KID (Key Information Document): An important disclosure document

In the EU, many ETFs available to retail investors provide a Key Information Document (KID) under applicable rules; availability and document type can depend on product structure and jurisdiction.

Practical tip: Review the KID before investing, where one is provided. Pay attention to the summary risk indicator, performance scenarios and cost breakdown. The KID can support comparisons, but it should be read alongside other fund documents and the ETF’s investment objective.

Beyond the numbers: Additional considerations

Multiple exchange listings

Many ETFs are listed on several exchanges and may trade in different currencies. This can affect trading costs and foreign-exchange conversion costs, but the ETF’s underlying holdings and any currency-hedging policy determine the main currency exposure.

Practical tip: Listing currency can affect conversion costs when the trading currency differs from the investor’s account currency. If investing from a euro account in a USD-traded share class, investors may face FX conversion costs when buying or selling. Separately, the ETF’s underlying assets determine the main economic currency exposure unless the share class is currency-hedged. Hedging can add costs and may not eliminate currency risk.

Underlying assets

Understanding what an ETF holds is important, especially for sector or thematic ETFs where composition can vary significantly between seemingly similar funds.

Practical tip: Review the ETF's top 10 holdings and sector allocations. A technology ETF might be heavily weighted toward a few large companies or more evenly distributed across subsectors, which could affect performance and concentration risk.

By systematically evaluating these metrics and considerations, investors can compare ETFs more consistently and understand key trade-offs.