Best ETF

By: EconomyWatch   Date: 30 July 2009

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Identifying and investing in the best ETF is a strategy that a trader must follow. Best ETFs are those exchange traded funds that perform consistently over the years and have profit potential. Different traders use different parameters to identify the best ETF. However, it is always better to study an ETF’s portfolio before investing in it.

How to Identify the Best ETF

 

With an ETF available for almost every financial product, identifying the best ETF is a challenging task. A few factors to consider are:

  • Portfolio: ETFs are bundles of financial entities sold as stocks. Different ETFs invest different proportions in the underlying securities. You might invest in an alternative energy ETF thinking that more than 80% of the total value is invested in research work. However, it could be just 20%. Therefore, it is imperative for an investor to study the portfolio to know the exact ratio of the underlying securities.

  • Company’s past record: As ETFs are growing in popularity, many new companies are introducing attractive ETFs in the market. With almost homogeneous portfolios, identifying the best ETF gets tougher. Therefore, one should compare the companies that have designed the ETFs.

  • ETF market cap: Market capitalization is the product of the total outstanding number of shares and their current market price. The higher the market cap, the higher is the company’s value. Market cap also indicates the public consensus on a company.

  • Liquidity: ETFs can be sold like shares throughout the day. Some ETF segments have higher liquidity than others, enabling frequent intra-day trading. High liquidity helps in making profits by compounding small profits.

  • Risk factor: The underlying securities are the basis of any ETF. A trader should study the risk involved with these securities before investing.

  • Commission and fees: Gold ETFs have a higher commission fee than other ETFs. Therefore, inquire about all the charges applicable to the ETF and measure your profits accordingly.

  • Tax benefits: Some ETFs attract more tax than others. Therefore, if you want to trade on margins and compound the profits, then look for ETFs that attract smaller taxes.

In this fast changing economic scenario, it is a good idea to use fundamental analysis to identify the best ETF.


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