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What should I look for in an Exchange-Traded Fund?

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An exchange-traded fund should provide a prospectus to investors upon request. The prospectus is a document that details the operations of the exchange-traded fund, so it’s an invaluable resource for you as you consider investment in a fund. As a beginning step, be wary of any exchange-traded fund that fails to send you a prospectus, or whose prospectus or website relates very little financial data about the fund. Additionally, as you review the prospectus or visit the website of the fund, ask yourself the following questions as a starting point for your investigation:


  • How diversified is the fund? One of the main advantages you should expect from an exchange-traded fund is its diversity, which in turn reduces your risk as an investor. Given that fact, you’ll want to ensure, first, that the fund actually manages a portfolio of multiple, varied securities. If that is in fact the case, you should then examine the securities/bonds within the fund. Are the securities in question generally profitable? If the answer is no, the sheer number of stocks alone won’t necessarily translate into a consistent return.
  • What are the brokerage fees and expense ratio? Since you’ll pay a commission on each trade, it’s important to know how much you’ll pay per trade. Remember also that while mutual fund expense ratios are sometimes as high as 3%, exchange-traded fund expense ratios are almost always less than 1%. If you get stuck with an unusually high expense ratio when choosing an exchange-traded fund, you lose one of the more significant advantages of such a fund.
  • Who makes decisions for the fund? Does the manager of the fund portfolio have a proven track record of investment success, or at the very least a straightforward statement of investment strategy with which you’re comfortable? You’re paying the fund for their investment experience and ability, so make sure you’re comfortable with their level of expertise.



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