August 22, 2011

Schwab Releases ‘How to Pick an ETF’ Guide

Michael Iachini’s report lays out basics of costs, structure, sponsor and track record

With assets under management in global exchange traded funds seen doubling or even tripling by the end of 2015, Charles Schwab has released a primer for investors that explains what they should look for when choosing an ETF.

"How to Pick an ETF," written by Schwab’s Michael Iachini (left), director of investment manager research, answers investors’ questions about how to determine a fund’s costs, structure, sponsor and track record.

The report targets advisors as well as retail investors, Iachini said in an interview on Friday. “These are questions that advisors also ask and need help with,” he said.

Iachini added that although he has already written a number of articles for Schwab that address ETF-related subjects, “How to Pick an ETF” is the first article where he lays out the basics.

“Figuring out which ETF to buy should begin with a solid investment thesis," Iachini noted, saying, “it’s not just about seeing what ETF is doing well.” After formulating an idea, investors should then pick funds based on their market exposure and the basket of stocks they’re interested in, he said.

Second most important in getting started is the cost, Iachini said, including the operating expense ratio, bid-ask spread and commissions.

While investors are ill advised to chase performance regardless of whether they’re putting their money into stocks, mutual funds or ETFs, other investment considerations are specific to ETFs, Iachini said. For example, he recommends ETFs with at least $20 million in assets. And trading volume should not be too thin, he added, recommending no less than $500,000 per day.

Also specific to ETFs are making sure that a fund has traded at a price close to the true value of the underlying portfolio’s net asset value, Iachini said.

For more of Michael Iachini’s tips, click here on "How to Pick an ETF."

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