ETFs: A complete guide to choosing the best

What is an ETF?

An ETF also known as an Exchange-Traded Fund is a type of mutual fund that trades on an exchange, just like a single stock. This means that ETFs can be bought and sold during the regular trading hours of the financial markets. ETFs are designed to track the performance of a specific benchmark index, such as the S&P 500 or the FTSE 100. This means that when you buy an ETF, you are in effect buying a portion of a portfolio of securities that reflects the performance of the reference index.

What are the advantages of ETFs?

ETFs offer several advantages over other investment instruments. First, their open-ended fund structure allows investors to buy or sell shares of the ETF at any time during market hours, therefore offering greater flexibility than traditional mutual funds. Furthermore, ETFs are usually characterised by lower management costs than mutual funds, thanks to their passive investment structure.

Another benefit of ETFs is diversification. Because ETFs track a benchmark index, investors can gain exposure to a wide range of stocks in a single investment. This helps reduce the specific risk associated with a single stock or sector.

How to choose the best ETFs 

When it comes to choosing the best ETFs for your portfolio, there are several factors to consider. Here are some key points to keep in mind:

• Purpose of the investment 

First of all, it is important to establish the goal of your investment. If you want to gain exposure to a specific market, such as energy or technology, you can look for ETFs that track the corresponding sector indices. Similarly, if the goal is to gain broad, general exposure, ETFs that track broad indices, such as the S&P 500, may be an appropriate choice.

• Performance and history

Examining the past performance of ETFs can provide insight into their future performance. However, it is important to emphasise that past performance does not guarantee future results. Also, evaluate your fund management experience and see if you have achieved your goals over time.

• Liquidity and trading volumes

Liquidity is an important factor to consider when choosing ETFs. A liquid ETF is characterised by a high daily trading volume and tight spreads between bid and ask prices. Good liquidity ensures that investors can buy and sell shares of the ETF without significant problems and at fair prices. It is advised to opt for ETFs with a high trading volume to avoid situations where you may incur additional costs or trading difficulties.

• Costs and expenses

The costs associated with ETFs can vary significantly from fund to fund. It is important to carefully consider the management costs, known as the expense ratio, which represent the annual expenses incurred by the investor to own the ETF. Additionally, take into account other expenses as well, such as trading commissions and price spreads. A low expense ratio can help the overall return of the ETF over the long term.

• Investment structure and methodology

ETFs can follow a variety of investment strategies, including the passive approach, which simply tracks a benchmark index, and the active approach, which involves active portfolio management. It is important to understand the ETF's investment strategy and whether it aligns with your preferences and return expectations.

• Background size

The size of the ETF's fund can be indicative of its popularity and acceptance with investors. A significantly sized fund could suggest greater stability and liquidity. However, a large fund size may also mean less flexibility in executing investment strategies. Therefore, it is important to carefully evaluate this variable in relation to your needs and preferences.

• Research and evaluation

Use reliable resources and research tools to value ETFs. Financial rating agencies, specialised websites, research reports and expert articles can provide valuable information on the historical performance, portfolio composition and other characteristics of ETFs. In-depth research helps you make informed and knowledgeable decisions.

How to start investing in ETFs

If you're thinking about getting started investing in ETFs, look no further – XTB is the ideal solution for you. With XTB, you get access to thousands of different markets, all in one app. The XTB platform offers a huge selection of real ETFs and ETF CFDs, with over 350 real ETFs and 150 ETF CFDs to choose from.

What makes XTB even more attractive is its commission policy. You can invest in real stocks and ETFs without paying any commission, up to a monthly investment volume of 100,000 EUR. Once this limit is exceeded, a commission of 0.2% is applied on a minimum of only 10 EUR. This means you can invest without worrying about additional costs that could erode your returns.

Find out more about the ZERO commission offer

Furthermore, XTB is a reputable and regulated broker, which puts the safety of its clients' funds first. With a strong background in the financial sector, XTB offers an intuitive and easy-to-use platform, dedicated customer support and a wide range of research and analysis tools to help you make informed decisions.

With XTB you have everything you need to start your investment journey. Take advantage of their large selection of ETFs, competitive fees and the ability to invest even with a small amount of capital. Take control of your financial future today with XTB.

Conclusion

ETFs offer a flexible, diversified and efficient investment option for investors. To choose the best ETFs, it is essential to consider your investment objective, past performance, liquidity, costs, investment structure, fund size and available research. Carefully weighing these factors can help investors identify the ETFs that best suit their financial needs and goals.