What are the best metrics for ETFs?
A favored measure is tracking difference—a statistic that looks at how far an ETF has lagged its benchmark, on average, over a one-year period. Tracking difference incorporates the effects of an entire range of management decisions, from securities lending to optimization decisions.
Technical indicators that work well on higher time frames will act as major points to focus on when investing or trading. EMAs, RSI, Stoch RSI, MACD, and CME gaps are great indicators for your ETF strategy; choosing the right ETF will also mean that the technicals of a chart look attractive to dive deeper.
Each ETF is rated relative to others in its category using six different metrics, including liquidity, expenses, performance, volatility, dividend and concentration.
The two ways to see how closely an ETF matches the index performance are 'tracking error' and 'tracking difference'. Tracking difference addresses how closely the ETF tracks the index returns, while tracking error reflects how consistent over time the tracking quality is.
Morningstar excels in its ability to provide a holistic analysis of ETFs. Investors can access detailed information on a fund's historical performance, risk metrics, and expense ratios.
Actively Managed ETFs. Passive ETFs are commonly referred to as index funds, which track specific benchmarks. Passive ETFs aim to replicate the benchmark's performance and the fund's asset allocation is based on this goal.
Evaluate the ETF's Premium or Discount
If the ETF is trading at a premium, it could indicate that the ETF is overvalued. If it's trading at a discount, it could indicate that the ETF is undervalued.
Invesco QQQ ETF (QQQ) is an exchange-traded fund that tracks the Nasdaq-100 Index™. The index includes the 100 largest non-financial companies listed on the Nasdaq, based on market cap.
Scores range from 0 to 10. Lower scores on High Water Stress Exposure metric improve the ESG score of an ETF, whereas higher scores on the Low and Moderate Water Stress Exposure improve the ESG score of an ETF. Energy Efficient ETFs can be evaluated across one metric: Revenue Exposure to Energy Efficiency.
Low cost: Since ETFs generally track an index, the operational costs are low, and the cost savings are passed along to the shareholders of the fund.
What makes an ETF successful?
The benefits of the ETF wrapper relative to other investment vehicles – transparency, liquidity/intraday tradability, low cost and tax efficiency – offer what we call structural alpha to the end investor. That is one way in which an ETF solves an investor problem.
- Identify the ETF's ticker symbol.
- Examine the ETF's investment objective.
- Analyze the ETF's performance history.
- Check the ETF's expense ratio.
- Evaluate the ETF's holdings.
- Analyze the ETF's risk metrics.
Average ETF returns vary, but on average, you should expect to generate an annualized return of 7-10% over a ten-year period. Investors must also understand that ETFs will not always produce positive returns each year.
| Fund (ticker) | YTD performance | Expense ratio |
|---|---|---|
| Vanguard S&P 500 ETF (VOO) | 10.4 percent | 0.03 percent |
| SPDR S&P 500 ETF Trust (SPY) | 10.4 percent | 0.095 percent |
| iShares Core S&P 500 ETF (IVV) | 10.4 percent | 0.03 percent |
| Invesco QQQ Trust (QQQ) | 8.6 percent | 0.20 percent |
But to be clear, Ramsey's all in favor of using ETFs when used properly. For investors who can use ETFs as part of a long-term, buy-and-hold investment program, rather than as trading vehicles, Ramsey has nothing bad to say about them.
| ETF | Assets Under Management | Expense Ratio |
|---|---|---|
| Vanguard Information Technology ETF (VGT) | $70 billion | 0.10% |
| VanEck Semiconductor ETF (SMH) | $16.3 billion | 0.35% |
| Invesco S&P MidCap Momentum ETF (XMMO) | $1.6 billion | 0.34% |
| SPDR S&P Homebuilders ETF (XHB) | $1.8 billion | 0.35% |
Holding too many ETFs in your portfolio introduces inefficiencies that in the long term will have a detrimental impact on the risk/reward profile of your portfolio. For most personal investors, an optimal number of ETFs to hold would be 5 to 10 across asset classes, geographies, and other characteristics.
To look for the edge of an ETF, you can use technical analysis to identify its strengths and weaknesses, as well as its opportunities and threats. For instance, you can use sector analysis to see which industries are outperforming or underperforming the market.
QQQ tracks a modified-market-cap-weighted index of 100 NASDAQ-listed stocks. QQQ is one of the best established and typically one of the most actively traded ETFs in the world.
- First Trust Growth Strength ETF FTGS. ...
- Communication Services Select Sector SPDR ETF XLC. ...
- iShares Semiconductor ETF SOXX. ...
- SPDR Portfolio S&P 500 ETF SPLG. ...
- iShares MSCI USA Quality Factor ETF QUAL. ...
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Is it better to invest in one ETF or multiple?
The majority of individual investors should, however, seek to hold 5 to 10 ETFs that are diverse in terms of asset classes, regions, and other factors. Investors can diversify their investment portfolio across several industries and asset classes while maintaining simplicity by buying 5 to 10 ETFs.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
Vanguard S&P 500 ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VOO is a great option for investors seeking exposure to the Style Box - Large Cap Blend segment of the market.
VGT - Performance Comparison. In the year-to-date period, QQQ achieves a 5.41% return, which is significantly higher than VGT's 4.63% return. Over the past 10 years, QQQ has underperformed VGT with an annualized return of 18.48%, while VGT has yielded a comparatively higher 20.21% annualized return.
What do analysts say about VOO? VOO's analyst rating consensus is a Moderate Buy. This is based on the ratings of 505 Wall Streets Analysts.
