Expense Ratio

When building a portfolio, it’s important to target ETFs with lower expense ratios. You can’t control returns, but you can control what fees you are willing to pay. An ETF expense ratio refers to how much you’ll pay per year for owning the fund. The average ETF has an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest. This may not seem like a lot, but it can add up over the long term.

Holdings

ETFs make it possible for relatively small investors to gain access to a large, well-diversified pool of assets with the purchase of a single share. Holdings simply refer to what stocks make up the fund. The SPY ETF, which is a popular S&P 500 fund, has $264.17B assets under management that are distributed across 506 stocks. While it has the most money invested in Microsoft, this holding only makes up around 5-6% of the Fund’s total assets. There are funds where 20% or more of their assets are invested in Microsoft, so if you’re looking for heavy allocation in a particular stock, make sure you take a look at the holdings. This will tell you what stocks make up the fund and how much of the Fund’s assets are allocated to each one.  

Tracking Difference

The vast majority of exchange-traded funds are designed to track indexes. The tracking difference shows how an ETF’s performance compares with that of its benchmark over a certain period of time. This metric can be positive or negative and tells you the extent to which a fund has out- or underperformed its benchmark index. You want to invest in ETFs that track their index as closely as possible.

Pro Tip: ETF.com provides a Tracking Difference calculation on the landing page of each ETF in the US. For example, head over to https://www.etf.com/SPY and search the page for “tracking difference”.

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