Low-cost investing is in vogue, which has driven an explosion in exchange-traded funds or ETFs. These investments track an index or commodity and trade like a stock. Further, they are passive, which means they are also cheaper to run.

For price-conscious investors, ETFs should be part of a balanced investment portfolio. But not all of them are created equally from the fees they charge to the underlying investments they are comprised of. As a result, investors have to know a few things before purchasing an ETF. (Read more, here: Should You Buy Stock Or An ETF?)

Figure Out Why You’re Investing First

Before investors can compare other aspects of ETFs, they have to know what they want to invest in and why. Just like with stocks and mutual funds, options abound, making it tough to narrow it down if you don't know what you are looking to achieve. If its risk-averse investors are seeking a way to get stock exposure, then they may want to look at more stable stock focused ETFs that invest in large-cap companies. For risk-seeking investors, there are more exotic ETFs that could give them a higher return. Without understanding what the aim of the investment is, investors are quickly going to get overwhelmed by the number of different ETFs on the market.(Read more, here: The Benefits Of ETF Investing.)

Pay Some Attention To Fees

One reason people opt for ETFs is because of the low costs associated with them. However, while generally ETFs are cheaper than other fund investments; some ETFs can be quite pricey. Investors need to pay attention to the ETF's operating expense ratio and trading commissions when comparing ETFs. According to the Wall Street Journal, the average expense ratio on an ETF is 0.44%. ETFs that invest in more focused, risky industries, regions or investments can cost more than the average. While investors can purchase ETFs from all sorts of brokers, some are going to charge a commission for purchasing the ETF. That cost can be eliminated by going with brokers who don’t charge a fee when you purchase shares or sell them. Also, be aware of the fine print. Some of the time those free trades may not be so free. (Read more, here: How ETF Fees Work.)

Does The ETF Do What It Says It Does

The whole idea behind ETFs is to track a specific index—whether it’s a basket of large cap stocks or a bond index. ETFs that track the S&P 500 or the Nasdaq are the old stalwarts of the industry, but newer ETS are getting creative when it comes to following an index. When considering an ETF, investors need to know what does the index track and what is the ETF comprised of. If it’s indexing something not that well known it should give investors pause.

Make Sure The ETF Will Have Staying Power

When it comes to choosing an ETF, investors also have to be mindful of its level of assets. That can clue them in if an ETF has staying power. After all, if the ETF doesn't have a lot of interest, it will lack the profitability that makes it worthwhile to keep the fund operational. Rule of thumb: go with an ETF that has at least $10 million in assets. The ETF should have a good trading volume as well to prevent from big moves if there's a substantial buy or sell.

The Bottom Line

ETFs are a low-cost way for investors to get exposure to different investments, but investors have to be selective when deciding which one to buy. Not only does the ETF have to match the investment objectives, but it also has to have low fees and enough assets to make it a smart bet.

 

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