The Ultimate Checklist: How To Choose The Right Exchange Traded Fund (ETF) To Invest In?

The Ultimate Checklist: How To Choose The Right Exchange Traded Fund (ETF) To Invest In?

Ming Feng

If you have been following enough financial bloggers as well as the Seedly Personal Finance Community, the acronym ETF should ring a bell.


Well, ETF stands for Exchange Traded Fund. And it’s a financial instrument that was designed for passive investors.

Investing in ETFs kind of like getting cai png. It’s affordable, offers a variety of “ingredients”, all neatly served on one plate. And it fills your tummy.

Plate of cai png
Image Credit: EatBook

What Is An Exchange Traded Fund (ETF)?

  • Unlike a mutual fund, an ETF is a passively managed investment fund that is traded on the stock exchange
  • Since it is being traded on the stock exchange, it usually has high liquidity of buyers and sellers
  • An ETF is usually passively managed to track an index, a commodity, bonds or a basket of assets like an index fund
  • Due to high liquidity, the price of an ETF is expected to change frequently
  • They usually have lower fees when compared to a mutual fund, making them an attractive option for investors

While we’ve talked a lot about the Straits Times Index Exchange Traded Fund (STI ETF), due to it being the most familiar ETF to Singaporeans. There are actually more than 4,000 ETFs around the globe.

Here’re some ways you can go about picking the right ETF to invest in.

The Ultimate Checklist: Choosing The Right ETF For You

While there is usually a long list of questions when it comes to an ETF due diligence checklist, we try to simplify them for average Singaporeans.

Here we have, a checklist of some of the questions you should be asking, before putting your money into an ETF. We break it down into parts, and if it is mostly a “YES” for the questions, go on and invest in it!

Evaluating the market

A common mistake an investor makes is to try to use past data to determine the performance of a fund moving forward.

Most of them fail to realise that what works in the year 2017 may not work in the year 2018 (very much like my tummy flattening workout exercises). 

The first step will be to understand some possible changes in the year 2018, which may impact the ETF which you are looking to invest in:

  • What are some of the possible economical changes that are very likely to happen? How will these affect various industry?

    Knowing some of the impending changes can help investor better prepare their portfolio.
    In the year 2018, there might be various tax changes for various countries, and a possible increase in interest rates by the USA Federal reserves.
    All these affects certain industries or countries more than the others. Hence, it is important to pay extra attention to them.

Evaluating your personal portfolio

Now that you have looked at the economy in the big picture, it is time to evaluate your own investment portfolio.

  • What kind of investor are you?

    Various investors have various risk appetite. Evaluate your personal risk preference before deciding if you should go for ETF investing.
    If you are the kind that have trouble sleeping when the price of your investment product fluctuates, ETF investing may not be the thing for you.

  • How will the addition of this ETF fit into your portfolio?

    For seasoned investors, they usually have a portfolio of investment products. Hence, the factor to consider when investing in an ETF is how will the addition of new ETF affect their portfolio. Should it expose their risk to an individual sector way more than the rest, or reduce diversification of their portfolio, they may wish to reconsider.
    If this is the first ETF that you are looking to get, something more diversified might be a better option.


Evaluating the index and ETF

An analogy on using past data to determine the ETF that will do well in future is like driving using the rear view mirror.

Start “driving” using the windscreen today! Here’s what you need to know:

  • What is the ETF tracking?

    Knowing what the ETF is tracking can help investor identify what sectors, companies or countries the ETF is focusing in.
    It is advice to only invest into an ETF investing in areas which you are well-versed in. Make sure to aline whatever the ETF is tracking with industries or countries that will do well as mentioned above.
    The last thing you want is to invest in an ETF without know what affects the price of it and where is your money invested in.

  • What is the investment objective of the ETF?

    The objective of the ETF should coincide with yours. it should ultimately be what you believe in.
    It is pointless to invest in a Social Media ETF if you are not a fan of Facebook or Instagram.

  • How frequent does the ETF report their holdings?

    The more frequent an ETF report their holdings, the more transparent they are to the investors.

  • What is the holding and weightings of the ETF?

    One common mistake is to invest in an ETF based on its name.
    A good example will be the Global X Social media Index ETF (NASDAQ:SOCL).
    While it invests in Facebook (9.9%), Tencent Holdings (12%) and Twitter (9%), a big percentage of it (31%) is exposed to a lot of other companies which are riskier and you may not have heard of.

    It is always to check out what the ETF is investing in, as any individual stock, REIT or instrument in their pool of investments can have an impact on their overall price and performance.
    Also, a Gold related ETF might be vested into mining companies. With this, it means that despite possible soaring gold price, the ETF may not do well if the mining companies do not do well.

What if two ETF looks like a good buy?

Assuming you did your research and derive at two ETF that looks like a good buy.

Here are some of the extra factors that can help you out:

  • Expense ratio

    To put it bluntly, the expense ratio is how much you are putting into the fund manager’s pocket. Expense ratio excludes the brokerage commissions when you buy and sell your ETF shares. If two ETFs are really too identical, expense ratio works.
    Of course, there will always be a lot of other factors involved. At times, one should not pay a Toyota price, hoping to get the performance of a Ferrari.

  • Liquidity

    If a certain ETF does not trade a certain number of shares per day, it is best to avoid it. The lack of liquidity can result in difficulty trying to sell your ETF in future. For short-term ETF traders, this factor plays an even more important consideration.

  • Tracking error
    High tracking error may indicate that an ETF is falling behind the index they are benchmarked with.
    Of course, there can also be time where ETF outperforms the benchmark.
  • Bid-ask spread

    The bid-ask spread of an ETF indicates how ready a market is. The more narrow the spread is, the more it facilitates trading.

Further Reading: STI ETF

For most Singaporeans, the STI ETF can be a familiar ETF to start with, given that it is mostly vested in familiar Singaporean companies.

Here are the 30 companies which the STI ETF invests in:

DBS Group Holdings Ltd13.01D05-SGFinancials
Oversea-Chinese Banking Corporation Limited12.62O39-SGFinancials
United Overseas Bank Ltd. (Singapore)10.55U11-SGFinancials
Singapore Telecommunications Limited9.28Z74-SGTelecommunications
Jardine Matheson Holdings Limited6.2J36-SGIndustrials
Hongkong Land Holdings Limited4.01H78-SGFinancials
Jardine Strategic Holdings Limited3.61J37-SGIndustrials
Global Logistic Properties Limited3.28MC0-SGFinancials
Keppel Corporation Limited3.27BN4-SGOil & Gas
CapitaLand Limited3.13C31-SGFinancials
Thai Beverage Public Co. Ltd.3.05Y92-SGConsumer Goods
Genting Singapore Plc2.35G13-SGConsumer Services
Wilmar International Limited2.21F34-SGConsumer Goods
Ascendas Real Estate Investment Trust2.17A17U-SGFinancials
Singapore Exchange Ltd.2.12S68-SGFinancials
City Developments Limited1.87C09-SGFinancials
Singapore Airlines Ltd.1.77C6L-SGConsumer Services
Singapore Technologies Engineering Ltd1.74S63-SGIndustrials
CapitaLand Mall Trust1.59C38U-SGFinancials
Singapore Press Holdings Limited1.48T39-SGConsumer Services
Comfortdelgro Corporation Limited1.41C52-SGConsumer Services
UOL Group Limited1.38U14-SGFinancials
Jardine Cycle & Carriage Limited1.36C07-SGConsumer Services
CapitaLand Commercial Trust1.13C61U-SGFinancials
Yangzijiang Shipbuilding (Holdings) Ltd.1.04BS6-SGIndustrials
Hutchison Port Holdings Trust1.01NS8U-SGIndustrials
SATS Ltd1S58-SGIndustrials
Sembcorp Industries Ltd.0.96U96-SGOil & Gas
Golden Agri-Resources Ltd0.84E5H-SGConsumer Goods
StarHub Ltd0.52CC3-SGTelecommunications
CapitaLand Commercial Trust Rights 2017-19.10.17 for Shares0.03CLOR-SGUnassigned

Read more: STI ETF: A Simple Way To Invest In Singapore’s Top 30 Companies

During your free time, you may wish to tune in to this podcast by Bloomberg too!



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About Ming Feng
A stint in Bloomberg gifted me with a beer belly, which only grew larger when I moved on to become a Professional Trader. Now I turn caffeine into digestible finance-related content.
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