How to compare ETFs
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.
Frequently Asked Questions about this Article…
When comparing ETFs, consider factors like the benchmark index, investment strategy, fees (management expense ratio), funds under management (FUM), and unit price. These elements help determine the ETF's performance and suitability for your investment goals.
Fees, known as the management expense ratio (MER), are crucial because they directly impact your returns. Lower fees mean more of your investment returns go to you rather than the ETF provider, making it a reliable predictor of future performance.
Funds Under Management (FUM) can indicate the ETF's popularity and sustainability. ETFs with low FUM might struggle to attract investors and could become unsustainable, while those with higher FUM are generally more stable.
Unit price is important when comparing ETFs replicating the same market. A lower unit price can make it easier to achieve the desired asset allocation and exposure, especially if other factors like FUM and MER are similar.
While you can compare ETFs from different asset classes, such as currency ETFs and Australian share ETFs, it may not provide meaningful insights. It's more effective to compare ETFs within the same asset class and market.
Key categories include country exposure (Australian or international equities), asset classes (equities, currency, fixed income, cash), and commodities. These help you understand the ETF's focus and strategy.
You can find information on ETF fees and performance through league tables that rank ETFs by type and compare them against industry averages. This helps you assess their cost-effectiveness and historical performance.
An ETF with low FUM might be less attractive because it could indicate a lack of investor interest, potentially leading to sustainability issues. It's important to consider FUM alongside other factors like fees and unit price.