How to Pick the Best ETF

Investing in the right ETFs can literally be the difference between you becoming a millionaire or slowly losing your money over time. And with over 8500 ETFs being traded on the stock market today, there's a chance that you could be investing in the wrong ETF. And so in today's article, I want to talk about specifically how I choose my ETF.

The different things that I'm looking forward to ensure that I'm only investing in the best ETFs that give me the greatest potential return. And there's one thing specifically in this video that nobody else talks about when it comes to investing in ETFs. And it could be potentially harming your long-term investment returns unless you're aware of it. 

Now, before we get into talking about how I actually choose my ETFs that I'm going to invest in, I want to first talk with you guys about why I choose to invest in ETFs in the first place over individual stocks, and even over index funds. So ETFs are basically the best of both worlds between stocks and index funds. 

Just imagine for a second that stocks and index funds got together and they fell in love and then they had kids, well those kids would be ETFs.

Pros of Stocks 

Now the good thing about individual stocks is that they can be bought and sold at any time throughout the day, as long as the stock market is open, which makes them a very liquid investment if you ever needed to for some reason quickly sell your investments. Well with stocks, you can do that. 

Cons of Stocks 

However, the bad thing about stocks is that they're not diversified. Let's say for example, that you owned one stock, and that one stock made up your entire portfolio. The problem with this is that the fate of your portfolio is now tied up with the fate of that company's stock. 

And imagine you invested all of your money, let's just say for example, $100,000 into meta stock back in September 2021, when the stock was trading at about $375. Well, your portfolio of $100,000 would now only be worth a little less than $50,000 because Mehta stock has dropped about 52% since last year. 

Pros of Index Fund

Index funds are a basket of hundreds and sometimes even 1000s of individual stocks all tied up into one simple convenient fund. And because of this, they are very diversified investments. For example, an index fund like the Vanguard Total Stock market index fund holds over 4000 stocks. 

And so when you invest your money into that index fund, it's basically like you're adding 4000 Plus stocks into your portfolio without you actually having to go out and buy 4000 Plus stocks. 

Cons of Index Fund

However, unlike individual stocks, index funds are not very liquid investments, because they're only traded once per day when the market closes. 

And so if you were ever in a situation where you had to quickly sell your investments to get access to your money, well unfortunately, with index funds, you wouldn't be able to get access to that money until the end of the day.

And so with that, I'd like to introduce you to my favorite stock market investment of all time, the exchange-traded fund. ETFs take the best traits from stocks and index funds and combines them into one convenient package.

Pros of ETFs

Just like stocks. ETFs are also traded on the stock market. And so you can buy and sell them at any point throughout the day, as long as the stock market is open. And just like index funds. 

ETFs are also highly diversified investments that can hold hundreds and even 1000s of individual stocks all wrapped up within one single ETF. And that is why I choose to invest in ETFs over individual stocks and index funds.

So now the question becomes how exactly do I find what ETFs I'm going to be investing in, there's a few things that you should always look for when deciding on what ETFs to invest in. 

Who's the ETF provider

And one of these things is more important than anything else, but it's something that most people don't even know about. But before we get to that, let's talk about a few other things that are also important to look for within an ETF and the first is the ETF provider who's actually issuing the ETF is at Vanguard Invesco, Charles Schwab. 

There are over 200 Different ETF providers issuing ETFs for investors like you and I to invest our money into However, not all ETF providers are the same. In fact, buying ETFs from the wrong provider can have a significant impact on the performance of your investments. 

ETF Provider

And because of this, you want to make sure that the ETF provider whose ETFs you're investing into not only has the technology and stability to keep costs down but to also manages risk appropriately.  

The Expense Ratio

But, speaking of costs, the expense ratio is one aspect of an ETF that cannot be overlooked. The expense ratio measures how much you'll pay to own the ETF over the course of a year. 

This money pays for things like the cost to manage the fund marketing, employee lunches at Applebee's and any other costs associated with running the fund, and an expense ratio is measured as a percent of your investment in the fund. For example, if you invested $1,000 into an ETF with a 0.04% expense ratio.

This means that you would pay $4 per year on that $1,000 that you have invested. If you had $10,000 invested into the same ETF with a 0.04% Expense Ratio, you would pay $40,000 per year on that $10,000.

And keep in mind, okay, this money that you're paying is not like a subscription where the company takes money directly out of your bank account to pay for the ETF instead the fees are taken directly out of your investment.

The reason expense ratios are so important with an ETF is because A high expense ratio could potentially cost you hundreds of 1000s of dollars over the course of your investment's lifetime. For example, these two ETFs ARKK and VTI, are two very popular ETFs with very different expense ratios.

So our ETF has an expense ratio of 0.75%, which is almost 1%, while the other ETF VTi has an expense ratio of only 0.04%. Well, after 30 years of investing $6,000 per year into the ARKK ETF that has a 0.75% expense ratio using a 7% average return, you would pay $81,150 in fees. 

Meanwhile, if you invested that same money into VTi, with a 0.04% Expense Ratio, after 30 years of investing, you'd only pay about $4,656 in fees. And so to keep as much of your money in your pocket as possible, I'd recommend that you always invest in a low-cost ETF with a low expense ratio. 

The Dividend Yield

The next thing you should pay attention to is the dividend yield of the ETF dividend payments can either be the greatest thing ever for an investor or the worst thing to happen since chocolate goat milk.

If you're investing instead of a tax-advantaged account, like a Roth IRA, or 401K, then dividends are great because inside of these accounts, especially the Roth IRA, your dividends are protected from being taxed. 

But if you're investing inside of a standard non-tax-advantaged brokerage account, then your dividends are being taxed as they're being paid out to you, and depending on if these dividends are qualified or non-qualified will change how much you're being taxed. 

Qualified dividends

Qualified dividends are taxed as long-term capital gains. which means you'll either pay 0% tax 15%, or 20% taxes on your dividends depending on your ordinary income tax bracket. 

Non-qualified dividends

Non-qualified dividends are automatically taxed as ordinary income. And so depending on where you fall in the tax bracket will determine how much you have to pay in taxes on those dividends. 

And so all of these taxes on your dividends will erode your investment returns over time, especially if the ETF pays a higher dividend. Now for some investors, especially if you're investing for income,

this may not be that big of a deal. But if you're investing long-term for retirement and you're not investing inside of a tax-advantaged account, then dividends are actually kind of a bad thing. 

Assets under management

The next important factor to consider when choosing your ETFs are the assets it has under management. For example, if 100 People are collectively investing $1 million into an ETF, then that ETF has $1 million in assets under management. Now, broadly speaking, the more assets under management that an ETF has the better.

High assets under management

Not only is it an indication that a lot of people are investing their money into the ETF, which means it's probably a pretty good ETF. But it also means that the ETF is going to have a lot more liquidity which makes it easier to buy and sell on the stock market. Something else to consider about ETFs is the turnover rate. 

And this really only applies to actively managed funds like the Ark ETF, but the turnover rate measures how often a fund buys and sells stocks. ETFs that have a higher turnover rate will usually incur higher capital gains taxes, fees commissions, and other expenses, which are then taken out of the fund's assets.

Which directly affects you as the investor. And what's even worse is that some actively managed ETFs and mutual funds have fund managers who will aggressively trade stocks just to try and increase their personal commission.

This is extremely shady stuff that you want to try and stay away from as a general rule of thumb, a turnover rate of above 20 to 30% is highly skeptical, and you should avoid investing in that ETF the turnover rate can be found on the fund's detail page.

The turnover rate

For example, if I wanted to see what the turnover rate was for this Vanguard fund, I would just scroll to the portfolio composition and find the turnover rate which for this fund is 25.1%, which is normal. And the final thing to consider about ETFs is the underlying index. 

Most people when they're choosing their ETFs will only look at things like the expense ratio assets under management and the fund's issuer. And without a doubt, all those things are very important. But there's one thing that most people never look at, and I would consider it to be the single most important thing that you should be looking at when choosing what ETFs you want to invest in.

Underlying index

And that is the underlying index of that ETF and how the stocks within that index are weighted. For example. Okay, an ETF like VOO or the Vanguard s&p 500 ETF is one of the best ETFs to invest in without a doubt its underlying index is the s&p 500 which is one of the most popular indexes in the world. And for good reasons.

It tracks the 500 largest companies in the US. If we look at the VOO ETF, it's basically only investing in large-cap stocks. And so if you were only investing in VOO as in it made up 100% of your portfolio, this means you wouldn't have any exposure to small and mid-cap stocks. 

And because of that, you could be missing out on some pretty significant gains because small and mid-cap stocks have a lot more growth potential than large-cap stocks but you would have never known this unless you knew to check the ETFs underlying index to see how the stocks within that index are weighted.

So if you wanted to fix this and get more exposure to mid and small-cap stocks, you can still hold vi o in your portfolio but just find another ETF that also invests in mid and small-cap stocks such as VO, which is the Vanguard mid-cap ETF or VB, which is the Vanguard small-cap ETF. 

Now if all of that sounds like way too much work, and you would prefer me just to give you a list of the ETFs that I invest in, or I recommend that you invest in Well, here it is. So I'm gonna break this down into a couple of different lists.

ETFs I'm Investing

But the first list here are the ETFs that I personally am investing in. So the first ETF on the list is VTI, or the Vanguard Total Stock Market ETF, this ETF essentially invests in the entire US stock market with over 4000 plus stocks. And so when you buy shares of this ETF, you're immediately given your portfolio exposure to the entire US stock market. 

And then to make my portfolio lean more toward the tech sector of the stock market, I'm investing in QQQM, or the Invesco NASDAQ 100 ETF, this ETF is based on the NASDAQ 100 index, which is a very tech-heavy stock market index with over 50% of the index being made up of non-financial tech stocks. 

And so VTI and QQQM is what I'm currently investing in within my Roth IRA. And then I've got my standard brokerage account, which I'm investing 100% of into SCHD or the Schwab us dividend equity ETFs.

And so as of right now, those are the only three ETFs that I'm currently investing in within my entire portfolio. Now at some point, I will consider adding VX us to my portfolio to give myself some international exposure. 

If you aren't in a position to invest in physical real estate, or perhaps you just don't want to have to worry about the extra hassle that goes into investing in physical real estate and you could do one of two things you could either invest in VNQ, which is Vanguard real estate ETF, this ETF will give you broad exposure over the entire real estate market.

Or you could use a service like Fundraise to invest in real estate that way. Overall, though, this list will show you my favorite ETFs to invest in based on specific investment strategies. If you wanted to keep it as simple as possible and just invest in the broad market then investing in an ETF like VTI, VOO or VT is the best option.

And then finally the best ETFs and other asset classes outside of stocks include BND, or the Vanguard Total bond market ETF which gives you broad exposure to the bond etf VNQ which we already talked about gives you broad exposure to the real estate market, and then VXUS or the Vanguard Total international stock ETF which gives you broad exposure to international stocks outside of the US.

A list of the best ETF issuers, are Vanguard, Invesco, State Street, BlackRock, ProShares, and Charles Schwab. Now are there other good issuers besides these right here, of course, there are but in my opinion not any investment advice these will help you for the future performance, these are the best of the best.