Introduction

How do you choose an ETF? What factors should be considered beforehand? Before trading ETFs, there are five factors you should consider: Expenses, Performance, Liquidity, Asset Allocation, and NAV. Let's dive in!

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Key Takeaways

• A lower expense ratio means potential higher returns.
• The more tightly an ETF tracks its underlying stocks, the better they perform.
• A highly liquid ETF is important, especially when you want to exit the position.
• Know what company’s stocks are included in an ETF.
• NAV provides a reference price point when you are trading an ETF.

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Expenses

Checking the expense ratio is an important step to gauge the performance potential of an ETF because a lower expense ratio could possibly indicate a higher return.

For example, ETF A has an expense ratio of 0.95%, and ETF B has an expense ratio of 0.50%. Assuming that they track the same index and have a similar performance rate, investing in ETF B would generate higher returns.

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Tracking Results

Expense is not the only thing to consider. It's also essential to learn how well an ETF tracks an index. Generally speaking, the more closely an ETF tracks an index, the better they perform.

So, knowing the index ETF benchmark is necessary for every investor who wants to trade them.

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How to Find Tracking Results on Webull

• Compare price movement 

Both ETF 1 and ETF 2 track the S&P 500 index. The numbers show that ETF 2 tracks the index more tightly than ETF 1.

• View performance details

The performance details will provide specifics that you can analyze more intuitively.

The picture shows that ETF 2 has stable returns while ETF 1 has higher returns but isn’t stable. In this situation, you can choose based on your needs.

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Liquidity

Liquidity is an important factor to consider when choosing an ETF. Usually, we can use trading volume and bid ask spread to decide whether an ETF is trading with high liquidity. Generally put, if you find an ETF with a high volume and narrow Bid-Ask spread (the difference between the bid and ask price, which has changes that reflect the demand and supply movement between buyers and sellers), this ETF is showing high liquidity, and vice versa. A highly liquid ETF is important, especially when you want to exit the position.

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Asset Allocation

One more way to evaluate an ETF is asset allocation. You need to know what companies are included in an ETF so you can understand it better.

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Net Asset Value

Generally, the net asset value (NAV) can be recognized as a price base when you sell or buy an ETF. Knowing the history price base can show if you are trading at a discount or a premium. In other words, the NAV provides a reference price point when trading an ETF.

For example, if you want to buy 100 shares of an ETF with a NAV of $79, and someone offers $74, you will need a price basis to judge the offer. In this situation, where someone gives a price below the actual value, you probably think it is a good deal. At this point, the NAV is a useful and powerful tool to help you to judge an ETF's value.

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Summary

Before buying an ETF, you should consider a variety of factors based on your unique needs. As an investor considering adding an ETF to their portfolio, it’s necessary to track the performance of the ETF you’re interested in, understand its liquidity, asset allocation, and NAV to ensure you’re as informed as possible before you make your trade.