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How to compare ETFs

Exchange Traded Funds (ETFs) come in many shapes and sizes. There are active and passive, ones that just look at a single commodity or currency, index ones, ones that follow a basket of selected stocks and even ones that have leverage built in.
By · 28 Jan 2021
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28 Jan 2021 · 5 min read
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Therefore, when looking to compare one ETF against another we need to make sure the comparable ETFs are replicating the same market with similar characteristics. While there’s nothing to stop you comparing a currency ETF with an Australian share ETF, it won’t necessarily reveal anything meaningful.

Even within the same asset class, not all ETFs were made equal. For example, while a broad market ETF (that mirrors the ASX200 Index) and one that invests solely in small caps (like the ASX Small Ords Index) both invest in listed Australian stocks, the playing-field is by no means level, and absolute direct comparisons will be unreliable.

With that in mind, here are some key differentiators to consider when running a ruler over ETFs to see how they directly compare.

Factors to consider

For starters, put ETFs into different types according to the benchmark index and investment strategy they have in common. The key categories include country exposure (Australian or international equities) then look at asset classes equities, currency, fixed income and/or cash and finally commodities.

So what factors can you use to differentiate between ETFs replicating the same underlying market?

Fees and performance

Fees are a good start point.

As with any investment, one of the most reliable predictors of future performance is the fees charged. ETF fees are known as the management expense ratio (MER). Everything else being equal, the cheaper the ETF, the more returns go to you rather than the ETF provider.

There’s no shortage of league tables to help you rank performance and compare fees by ETF type, and against the industry average – which for Australian ETFs is 0.49%.

Much of the repeated outperformance of InvestSMART’s ETF portfolio can be attributed to it being a low-cost fund manager, with an expense ratio of 0.44%.

FUM

Another way to differentiate between ETFs is to check out Funds Under Management (FUM). While size isn’t a showstopper, some ETFs may fail to attract strong fund inflow for good reason, and ETFs with extremely low FUM may become unsustainable.

Unit Price

The price of the security can also be a determinate. For example, say two ETFs are replicating the same underlying market (i.e. the ASX 200) however one is priced at over $100 a unit, which makes it hard to achieve scale or the correct asset allocation levels you might want. The second has a unit price of say $30, which does allow you buy the correct level of exposure.

Again, things like FUM and MER need to be considered first, but if they are fairly even, unit price becomes a factor as well.

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