How to evaluate ETF performance

Every ETF investor wants his fund to perform at its best, but knowing which funds to choose can be difficult. It is easy to understand why you would rather invest 20% instead of 5%, but there are other factors that determine whether an ETF is right for you. Here are some tips that everyday investors can use to evaluate ETFs.

Understand the core advantages of ETF

Never invest or purchase assets without first understanding the assets. You need to know why you want to invest money in ETFs instead of mutual funds, stocks, rental properties, or gold bullion. The attractiveness of ETF lies in its core advantages, including liquidity,Diversify the portfolio,Low entry costAnd transparency. If these qualities are not the most important factor for you, then it may be time to look for different assets.

Clearly identify and understand your expectations. All investment performance is relative, so you will naturally evaluate the performance of ETFs based on the performance of other investments. ETF investors tend to value diversification, so ETFs should provide relatively effective diversification for every dollar invested. If you value low cost and liquidity, ETFs should provide relatively low costs and relatively high liquidity per dollar of investment. Essentially, find out which factors are important to you and tend to any asset that best reflects those factors. When you are faced with changes in product structure, benchmark index selection, trading volume, and risk exposure, this is especially important before buying an ETF. It is also important to consider the management team, capital costs and turnover.

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Assess independent factors

Unless a single ETF is your only investment, and if you have sufficient resources, this shouldn’t be the case, then it is wise to divide your assessment into two categories. These are variables related to the rest of your assets and important variables that are not related to the rest of your assets. Independent is probably the easiest to evaluate. To find the independent variables, consider those qualities that will always be positive if increased or decreased in the right way, regardless of the qualities of the rest of the portfolio.

For example, fund costs are an independent evaluation variable. Regardless of other factors, the lower the fund fee, the better. This applies to conservative and high-risk investors, domestic and international assets, and tax-exempt or taxable funds. Choose an ETF with a lower expense ratio because you cannot control the return, but you can control the fees you are willing to pay.

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Other independent factors that need to be evaluated are liquidity, index tracking, and tax avoidance. If you want to sell ETFs, your situation is always better when the secondary market premium is higher. Similarly, when buying an ETF, it will be better if it can be purchased at a larger discount. Unless the ETF is actively managed, it is better to manage more assets. At this point, actively managed funds bring many other statistical qualifiers, such as alpha, excess return, or value at risk (VaR). Although many investors care about these tools, not all experts believe in their accuracy or relevance.

Assess the relevant factors of the investment portfolio

The most direct investment portfolio dependent factor is fund composition. Whether your ETF tracks the Dow Jones Industrial Average or Nikkei is important. This is important if your ETF holds bonds or uses leverage. In addition, without understanding the role of underlying assets in a larger portfolio, it is impossible to fully evaluate them. For example, if your 401(k) is made up of mutual funds that track the S&P 500 index, you may not want to buy stocks in ETFs that track the S&P 500 index. It is better to track different indexes and reach out to new markets or reduce asset correlation.

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Also consider the depth of holding. If your only investments are your home and ETF, you may want a fund holding hundreds of stocks to increase diversification. On the other hand, if you have multiple different ETFs and want to achieve a specific industry concentration, it may be better to have a fund with fewer holdings and a more selective fund. ETF benchmark selection and tracking efficiency are important dependent factors. In some respects, the underlying index is more important than the size of the fund or its management team. The underlying index of your ETF determines its performance to a large extent, but it should also be suitable for your portfolio optimization strategy. Other important dependent factors include specific risk exposure, capital gains allocation, portfolio turnover rate and securities selection strategy.


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