We have covered previously the importance to start investing and early and what areas you should consider to increase your saving to invest. The most advised vehicule investment for beginners and passive investment style are Exchange Traded Funds (ETFs).
What are ETFs?
ETF is a security type of investment that is traded on the stock exchange. ETF behaves similarly as mutual funds as they replicate their strategy without the barriers of minimal investment size and lock-up period. ETF main goals are to replicate an index, a mutual fund or even become mutual funds with a dedicated strategy.
Advantages of ETFs
- ETF are traded on the stock market and therefore can be sold or bought at any time just like a stock.
- The minimum investment is the cost the share price (a mutual fund will usually request much more minimum investment)
- ETF can own hundreds of different stock and therefore offer great diversification potential at a cheap cost
- Lower expense ratio to manage the funds and reduce broker fees
Which ETF should I choose?
ETFs have massively in popularity in the past few years and now cover a very wide spectrum of strategy, asset type and dividend distribution. Considering we are aiming for continuous investment, passively managed and market diversification, you should take consideration for the following criteria:
- TER: Total Expense Ratio. You want to select and ETF with the lowest TER. Period.
- Volume: the higher the volume is, the more liquidity the fund should have.
- Tracking error for index or fund based ETFs: you want to select an ETF with the lowest tracking error compared to its counterpart it is replicating.
Useful links for further reading
Which ETF to choose?
As you will discover if you go on one of the ETF screener links given above, it is very easy to get lost in finding an ETF. In the next article, I will present you what I choose for my main ETF and why.