Today I’m going to walk you through the exact process of finding and choosing the ETFs to invest in, and I’m going to make it as easy as possible for you.
If you follow these steps, you’ll be able to easily identify and find the best ETFs amongst a jungle of almost 9000 existing etfs in the world. The method involves the use of a couple of websites, which are completely free to use, and I’m going to explain all the important concepts about ETFs that you need to consider in your choice.
At the end I will also give you a couple of ETFs based on some different investing objectives you might have, to give you some inspiration.
So let’s start.
Setting up the Screener in Seekingalpha.com
The first thing we’re going to do is setting up a screener that we’ll use to filter the best ETFs for us.
Go to seekingalpha.com, which is completely free to use and is going to be one of your best sources for investing.
Signing up is easy, when you click on “Try for free” and then on the basic plan (free plan). You can register either through a google, apple or facebook account or by entering email and password.
By exploring this site you’ll see that it covers a lot of topics on investing but what we need now is to click on “ETF screener” on the left bar:
This is a tool that helps you screen through all existing ETFs based on particular filters that we’ll see together. You’re going to be able to create your filters and save your screener so that you can easily use it again in the future.
Of course the job is not over with this screener, because after we identify some ETFs I’m also going to show you how to define which one is the best.
So the first thing you do is click on “Create New Screen”:
and you’re going to land on a page with just 3 filters: one is the “fund type”, one is the “Asset Class and Sub-Class”, and one is “Ratings”:
Before going through these concepts, let’s click on Advanced Filters and let’s choose all the other filters. In the category “ETF Details”, besides Fund Types and Asset Class & Sub-Class we’re going to select AUM (Assets Under Management) and Expense Ratio:
Then we switch to the category called Performance and here we select Year to Date Performance as well as “5y Total Return” and “10y Total Return”:
Move now to Holdings and select here the number of holdings:
Then move to dividends and choose the “Dividend Yield TTM”, which means Trailing Twelve Months:
Alright, click on Done and save the Screen with the name you prefer.
Understanding the Filters
Alright, we’ve got our screener set up, now let’s dive into the importance of the filters.
The first one is the fund type. I’m going to keep it short here, my humble suggestion is to stay away from leveraged ETFs or Inverse ETFs, just focus on traditional ETFs and you’re good to go.
Inverse ETFs instead profit when an index loses value, and in my opinion there’s no need to complicate your life even more with them.
Asset Class & Sub-Class
After the fund type we have the asset class.
This is probably the most important starting point, since the first question you need to ask yourself is “what kind of ETFs you want to invest in”.
You can choose for example the market size of the companies included in the ETF – Large, Mid and Small – as well as the investment style of the fund, which can be value, blend or growth.
If you put these variables in a square, like in the image above, you can see that the more you invest into small companies and/or growth companies, the riskier the investment is but also the higher are the potential gains.
Large companies tend to be more stable and safe, but at the same time aren’t going to grow as fast as some small unicorn companies anymore. Value companies, which are mature and have stable financials, are surely safer than growth companies like Tesla but also have less potential to grow.
So for the average investor I would suggest Large, because large companies are safer but still in index investing have performed better than small ETFs in the long term, and blend, which is the good balance between value and growth.
If you are an experienced investor and you can better consider your predisposition to risk, you might move in other directions.
Beside the Investment Style of the ETF, in this filter you can also select a particular sector, like communications, energy, financial, real estate, health, and also international equity like China, Emerging Markets, Europe and so on.
In general, if you want to diversify as much as possible you shouldn’t invest too much on sector ETFs. You might invest in general ETFs with Large Blend style and maybe if you have some particular interest in a Sector you can also buy some of it.
Assets under Management
The next point is the Assets under Management, or Fund Size.
A good ETF should have a minimum fund size of at least $100 million. Managing less than this value means there is less interest from investors and this translates into poor liquidity and wide spreads.
Poor liquidity on one side means it might become harder to sell in some critical situations.
Wide spreads means that your buy price is much higher than the market value and your sell price much lower.
Of course if you are investing in a really particular ETF typology it might be that there is nothing over $100 million, but always keep these thoughts into consideration.
Generally speaking, it’s preferable to invest in an ETF that is based on a broad, widely followed index rather than some small ETF that has a narrow industry or geographic focus.
The Expense Ratio is the percentage of the ETF value that you have in your portfolio that the fund manager is going to take as a management fee every year. So if you have for example an ETF with an Expense Ratio of 0.5%, it means that every year you’ll pay 0.5% of the value you possess of that ETF.
As a rule of thumb I’d say you should avoid ETFs with an Expense Ratio over 0.30%, but the truth is, the smaller the better. All the main ETFs from Vanguard, SPDR, Ishares and Invesco are under this threshold so you won’t have problems with this.
I chose 3 filters here because in the future you can play with all three but what I want to focus on now is the 10Y Total Return.
If you check the total return of VTI, which is the Vanguard ETF of the Total Stock Market, you see that in the last 10 years it had a 10y total return of around 217%:
I wouldn’t invest in an ETF which has a lower 10y return than this, because if you do, you might as well invest in VTI which will give you peace of mind because it has the widest diversification in the US Market.
Of course this is only a rule of thumb and if you want to invest internationally you’re definitely going to find lower performances than this. So feel free to play with this filter.
If you instead want to find ETFs that are younger than 10 years, you shouldn’t use the 10y Performance filter, because by using it they would be filtered out. Nevertheless, I strongly suggest you to invest in ETFs that have enough history of returns.
Now we are almost done with the filter, the next one is the number of Holdings and of course the lowest the less diversified is the ETF.
As a rule of thumb, choose ETFs with at least 100 companies, so you can use this value here. Additionally you should avoid ETFs where the top 10 companies weigh too much compared to the others, and we could have also chosen it as a filter, but let’s not complicate things too much.
The last parameter is the Trailing Twelve Months Dividend Yield, namely how much the ETF has paid as dividends in the last 12 months, and this is of course relevant only if you are interested in getting dividends. Right now I’m going to leave this untouched.
Choosing from the list
Alright, now we have the results of our screen and we can sort them as we like:
Let’s go for example to the tab performance and let’s click on “10y total return” on the right side. You might have to scroll the list to the right to find it.
We see that the best performers in the last 10 years have been VGT, QQQ and IWY – VGT and QQQ giving even more than 400% growth in 10 years. Now, these ETFs are all based on a Growth investment style, which doesn’t come as a surprise since in the last 10 years companies focused on growth have been performing the best.
Nevertheless, I’m not saying that you should invest in one of those ETFs just because they have had better performance in the last 10 years. In fact, 2 weeks ago I published a youtube video (and a post here) where I explained that Growth and Value Companies have been taking turns outperforming each other every decade for over 40 years. So in the next 10 years Value Companies might outperform again.
What I want to say with this is that it’s really important at the beginning to define a clear investment style that you want to pursue, and this was the asset class filter that we’ve seen at the beginning.
If you just choose an asset class, like Large Blend, you’re going to see that the number of ETFs that comes out is going to be strongly reduced, and if the asset class is a sector, like communications, financials or Real Estate, you might even get 0 results.
Based on the filter we set this tells you a lot about sector ETFs, because it means that if you want to invest in them, you need to either pay more management fee, or have an ETF with less holdings, which also means more risk, or worse than anything, accept a lower long-term return.
That’s why when you invest in ETFs you should invest in broad indexes that embrace many sectors – namely choose Large Blend, Large Value or Large Growth based on how much risk you’re ready to take.
But now let’s say that you are indeed interested in growth and therefore these 3 ETFs seem to be the best performers in the field. Thanks to the filters we set at the beginning, we are sure that these ETFs are solid choices. In fact they all have:
- billions of assets under management
- an expense ratio lower than 0.30% (or in this case even lower than 0.20%.)
- A good number of holdings
- Great historical performance
Deep Dive into our choices
So now we’ve got to dive a bit deeper into these 3 ETFs to see which one is actually our best choice. And to do this there are 2 steps we need to take.
First of all we are going to look for the official pages of the ETFs by just googling the ticker (or clicking on the following links):
- VGT, to get to the vanguard Information Technology ETF;
- QQQ to get to the invesco QQQ;
- IWY to get to the iShares Russell Top 200 Growth ETF.
You should always check the descriptions of the ETFs because they contain literally all the information you need, from general information, to the performance of the last 10 years, the price, the Portfolio composition including the number of holdings, as well as the sector exposure and details of the companies included.
But in particular there are two criteria that, if you did your job well with the screener as I explain, are not going to be a problem, but still it’s useful to know them:
One of them is the Spread between Bid and Ask and you find it for example for the Vanguard ETF under “Price”:
This is the current spread between the price you would spend if you buy this ETF now and the Price you’d get if you sold it.
Together with the trading volume, the spread gives an idea of how liquid the ETF is and the spread should be as little as possible. As I said, if you made sure to get only established ETFs with the screening before you should never have any problem here.
The second is the so-called Tracking Error. ETFs track market indexes, and the difference in performance between the market index and the ETF is called tracking Error.
If you check the performance of an ETF, you’ll see that they always show also the performance of the Benchmark, which is the underlying index:
In big established ETFs this difference is usually small, but in general it’s always a good thing to check that the ETF doesn’t differ too much from the performance of the benchmark.
A last comparison
The last step is going to be a comparison of the three ETFs that we are going to do with a website called portfoliovisualizer.com:
This website allows to make a clean comparison of all the ETFs and Stocks you want. In order to use it, you don’t need to sign in because otherwise you’re going to have to purchase a plan, instead you go directly into tools (top bar, far right) and click on Backtest Portfolio:
This is going to open a page with a lot of input that right now we don’t need to change. We are assuming we invest $10,000 and we leave 1985 as the Start Year:
Let’s go straight to the asset list and we write VGT for the first one, QQQ for the second and IWY for the third. Then we write that we are comparing three portfolios, each one composed 100% of one of the ETFs:
Click on Analyze Portfolios to get the results.
The first thing I want you to notice is that although at the beginning we left 1985 as a start date, the website automatically starts the analysis on the first date in which all 3 ETFs were available, which in this case was the end of 2009:
You can see the evolution of your $10,000 investment through time and the value you’d have now. Now first of all let’s take a look at the table:
Investing in VGT you’d have now $73,156,
investing in QQQ $72,801
and investing in IWY $57,242.
This might already give you an idea that VGT and QQQ might be better choices in the long term. But let’s look at the graph and see if we can make new deductions. What you can notice here is that, of course, the yellow line, which is IWY, has consistently been lower than the others, at least after 2016. But what’s interesting to see is that Invesco QQQ was the strongest performer at the beginning but VGT got closer in the last year and might outperform it by a lot in the future.
Conclusions with 3 Bonus ETFs
I can’t tell you which of the two is a better investment for the future, but we can surely say that this ETF Screener with the filters I described assured us of finding sound ETFs that will achieve good gains in the long term.
Before you switch to a new video, I told you I wanted to give you a couple of ideas for etfs, so here you go:
Number 1 is VTI, the Vanguard Total Stock Market Index Fund ETF, with an expense ratio of 0.03%, an average yearly return of over 12% in the last 10 years and over 4000 companies covering basically the whole american stock market.
Number 2 is VUG – Vanguard Growth Index Fund ETF. 0.04% Expense Ratio, over 13% yearly return in the last 10 years and focus on growth companies.
Number 3 is VT – The Vanguard Total World Stock ETF. With 0.07% Expense Ratio, this ETF gives you a mix of US stocks, Europe, Emerging Markets, Growth and Value, and all the Sectors you can imagine.