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Four-factor method for choosing the right ETF
12/12/2017 9:25:20 AM
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By Fund Library News Wire  | Thursday, November 16, 2017


 

 

By Michael Cooke, Senior Vice President, Head of Exchange Traded Funds, Mackenzie Investments.

With more than 500 exchange-traded funds (ETFs) listed in Canada, how do you pick the right one for your portfolio? That’s where it all starts. I suggest there are four key criteria for selecting an ETF that can help achieve your investment goals. Your financial advisor can work with you to assess the four criteria during your search.

1. How well do you know the ETF manager?

Like baseball managers, all fund managers need expertise in their field of play. Look at a manager’s experience and commitment to ETFs. Review their track record with all investments. What insights and tools are available from the manager to help navigate the ETF marketplace, build portfolios, and execute strategies? It takes size, skill, and expertise from a manager to realize the benefits of ETFs for investors.

2. What’s inside the ETF?

Look under the hood to see an ETF’s asset exposure. Is the targeted exposure broad or narrow? Check the depth of coverage of asset classes and look for any overlap or gaps with other index products or active funds.

If the ETF tracks an index, decide whether you want industry-standard indexes as benchmarks, or a more specialized index. Also, is the ETF’s index “trackable”? Is it comprehensive and representative of the investment opportunity? And consider the index methodology, which impacts the underlying exposure of the ETF.

The frequency of disclosure of an ETF’s holdings gives you a regular peek under the hood. The level of transparency can help you manage risk.

3. Can you trade when you need to trade?

Liquidity matters for most investments, but especially ETFs. The ability to trade ETFs quickly and easily on an exchange is often touted as a major benefit. However, a common misconception is that an ETF’s average daily trading volume alone determines its liquidity. In reality, the best measure of an ETF’s liquidity is determined by the liquidity of its underlying securities. An ETF’s bid-ask spread is a preferred measure of liquidity because it includes the liquidity of its underlying securities and the costs associated with the creation and redemption process.

Look deeper than trading volume to understand the true liquidity of the ETF.

4. What does the ETF really cost?

The last factor to consider is cost, naturally. Reducing investment costs is, understandably, an important consideration for many investors. Given investor expectations and ETF structural advantages, the right ETF for you should be cost effective. So look at what you would get from the ETF for what you would pay. Costs vary because investor benefits vary from ETF to ETF.

Worth the work

These four criteria will give you a lot to consider, but then selecting the right ETF is an important investment decision. It’s worth putting in the work up front. There is help, because your advisor can assist you with ETF assessments, answer questions, and provide information. Your advisor can also update you on innovation in the marketplace, such as the expanding ETF suite of Mackenzie Investments, which already offers Mackenzie Maximum Diversification ETFs and Mackenzie Active ETFs.

The four criteria – an ETF’s manager, exposure, liquidity, and cost – can support your game plan to make the right choices when investing in ETFs. This is an opportunity for you to learn more about ETFs and develop your relationship with your advisor.

Michael Cooke is Senior Vice President, Head of Exchange Traded Funds, at Mackenzie Investments. This article first appeared in the Fall 2017 issue of Your Guide to ETF Investing, published by Brights Roberts Inc. Reprinted with permission.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. Commissions, management fees, brokerage fees and expenses all may be associated with Exchange Traded Fund investments. Please read the prospectus before investing. Exchange Traded Funds are not guaranteed, their values change frequently and past performance may not be repeated.

 
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