Smart Investing: How to Find the Best ETF in Just 5 Steps

Bonus Content: Top 3 ETF to Buy Now

In the world of investing, there are over 10 000 ETFs available for you to make them part of your portfolio. These funds, either passively or actively managed, track indices like S&P 500 or specific theme, such as semicondutor or AI-based ETFs. Selecting the right one can feel overwhelming and requires thoughtful analysis to ensure that the right ETF aligns with your investment strategy.

Selecting the right ETF requires time spending in researching, analysing, reading recommendations or waiting for the right moment to buy. In investing, there is rarely a perfect moment. Once you choose the right one, the best approach is to start dollar-cost averaging — the decades old strategy of investing a regular sum monthly, aiming to reduce your average cost over time.

In five easy steps, I will show you how to save hours of research and analysis. This five steps will help you understand what you own, why you own it and what cost you to own it — essentials factors when making an investment decisions. Please, let me know in comments if you want me to write about how to analyse stock or top stocks.

Whether you’re a seasoned investor or a newcomer, these five steps will help you select the right ETFs at the right price and offer a diversified approach to building wealth.

Lets dive into these five crucial steps in selecting the perfect EFT for your portfolio.

1. Investment goals and strategy — Defining your goal and strategy is essential when choosing any investment. Each investment decision should align with your long-term objectives. The most common choice, for an investor with long investment horizon for capital appreciation is broad market ETFs, such as those tracking S&P 500, Russell 2000 or MSCI World Index, FTSE 100 etc. For example, Vanguard Total Stock Market (VTI), tracking the entire US stock market provide solid foundation for growth. These ETFs provide exposure to large basket of stocks and reducing risk through diversification across sectors and regions. If you are looking for income generation, you may look towards dividend- focused ETFs or fixed-income ETFs. A popular option here is Schwab US Dividend Equity (SCHD). Alternatively, if you wish to concentrate on a single sector or a theme, consider adding sector or thematic ETF to your portfolio. Sector ETFs focus on industries like technology, healthcare, or energy, while thematic ETFs might revolve around broader trends like clean energy, blockchain, or AI. For example, Invesco QQQ ETF (QQQ), tracking the tech-heavy Nasdaq 100 is popular for growth-oriented investors.

Top ETFs providers

ETFs Providers

Tip: Define your strategy to ensure that your portfolio serves its intended purpose, whether that is income generation, long-term growth or sector-specific exposure. Then, proceed to the next steps in selecting the right ETF.

2. Size and volume matters — you do not want to invest in a fund where you might be one of the largest investors. I recommend finding ETFs with at least 100 million in asset under management (AUM). A higher size often indicates solid investor interest, sufficient liquidity, more established performance history, making it easier to attract new buyers. We all want liquid funds, where there are many buyers and sellers. You should combine size with good volume numbers. suggest filtering for ETFs with over 3 million in daily trading volume. Higher volume means more trades, which increases your chances of getting a fair price when you buy or sell.

Tip: select ETFs with over $100 million in AUM and a daily trading volume above 3 million.

3. Expenses and hidden costs — fees and expenses can significantly erode your returns over the long term. When considering expense ratio, look for funds with less than 0,3% expense ratio. Asset managers, such as BlackRock (iShares), Vanguard and State Street (SPDR), are providing ETFs that are even cheaper — having funds with less than 0,1%. If your broker provides any of these ETFs — consider adding them in your selection lists. I mentioned brokers — ouch… your online broker can be your friend or enemy… There are many brokers that are charging commisions for buying and selling ETFs, such as II and Hagreaves Lansdown in the UK, or Interactive Brokers and Fidelity in the US. I recommend looking for brokers with low or zero fees (some offer commission-free ETF trading).

Tip: choose ETFs with expense ratios below 0.3% and a broker that charges minimal or no fees for ETF trading. Our recommended platforms are Trading 212 (£0 commision, UK ISA available) and Charles Schwab ($0 commision, US Rot IRA available).

4. Performance — its worth stating: past performance does not predict future returns. However, past performance is indicator for how an ETF is reacting on market events. Examine fund’s performance over 1y, 3y, 5y and 10 years, noting, how it performs in under various economic conditions. Compare the ETF’s performance with its benchmark index to determine if it has historically met its objectives. If the fund is tracking an index, consider adding tracking error to your selection criteria. A lower tracking errormeans the ETF is tracking its index better than one with a higher tracking error.

Tip: Consider ETF that has low tracking error vs its index + beating its peers over long-term (5y and 10y)

5. Holdings — yIt’s essential to understand what an ETF invests in and the concentration of its top holdings. The allocation to an ETF’s top 10 holdings can vary depending on its strategy and structure. Broad market ETFs, tend to have lower weight in top 10 as they aim to invest in wider range of investment usually replicating a broader index. For instance, S&P 500 ETF may have up to 20–30%, each company having no more than 6–7% weight. Thematic or sector-specific ETFs, often have higher concentration in top 10 holdings, as they tend to have fewer companies in their portfolio. Top 10 holding may account for 40–60% of the weight, with largest companies having 8–10%. In equally weight ETFs, each investment is given equal weight, regardless of the company size. Top 10 may represent a smaller percentage depending of the total number of holdings. There are also market-cap weighted ETFs, giving higher weights for the largest companies, leading to greater concentration in top 10.

Tip: Follow the guide above, and don’t invest in a fund that is having more than 40% in top 10 holdings (for Broad and Thematic ETF). Exercise caution with market-cap-weighted ETFs that concentrate heavily on a few stocks, as this may lead to increased volatility and reliance on those stocks’ performance.

Putting all together: define your stategy first. What are you looking for in ETF investment? Is it for long-term growth or dividend play? Then prioritise larger and cheaper funds, that are outperforming its benchmark and peers over long-term 5–10 years. Finally, review its concentration of the top 10 holdings and avoid larger than 40% concentration in top 10 holdings.

Bonus Content: Top 3 ETFs to Buy Now. We will provide you with the perfect portfolio mix, having broad ETF, low volatility dividend etf and sector-specific one.

1. Vanguard Total Stock Market (VTI) — a pure US play here. Top 10 holdings are less than 30%, 1,31% dividend yield with 11,79% dividend growth. Expense ratio is only 0,03%. Trading volume close to 3m. 5 years performance — 86,82% vs 86,48% of its benchmark CRSP US Total Market Index.

2. Schwab US Dividend Equity (SCHD) — the dividend play. Top 10 holdings are just over 40%, 3,47% dividend yield with 11,94% dividend growth. Expense ratio is 0,06%. Trading volume is over 9m. 5 years performance — 53,22% vs 51,82% of its benchmark Dow Jones U.S. Dividend 100™ Index.

3. iShares Russell 2000 (IWM) — A US small-cap play. Top 10 holdings are only 3,88% of the total weight, 1,17% dividend yield. Expense ratio is 0,19%. Trading volume is over 23m. 5 years performance — 41,97% vs 41,66% of its benchmark Russell 2000 Index.

   
   

Conclusion

Selecting the right ETF is a strategic decision that requires a solid understanding of your financial goals, cost considerations, and the underlying structure of the ETF. By following these five steps, you can make an informed choice that aligns with your long-term investment strategy.

If you would like to read more about how to pick the right investments for your portfolio, please write down in a comment or look at our service, here and find the right one for your currnet situation.