What are the factors to be taken into consideration before selecting any ETFs for investment?

  • Tracking Error: Lower and consistent Tracking Errors indicate that the ETF is efficient. The tracking error (TE) of an ETF scheme indicates the fund's performance deviation from its underlying benchmark. For example, if the benchmark returns 9.2% and the ETF mimicking / tracking this benchmark returns 9.1%, the tracking error of the fund is 0.1%. No fund can exactly replicate the performance of its underlying benchmark; there will always be a difference in returns due to TER, Cash Component, and other factors.

  • AUM (Assets Under Management): The size of the ETF scheme is an important consideration when selecting any ETF, because a larger AUM (Assets Under Management) indicates adequate liquidity in the scheme.

  • The cost: total expense ratio (TER) and transaction costs incurred by ETF schemes should be relatively lower, as higher TER can lead to Tracking Error, which may eventually reduce the fund's returns.

  • **Bid/Ask Spread: **The main factor to consider when buying and selling ETF units on the exchange is the Bid/Ask spread. The trading prices of ETF units must be close to the ETFs' real-time NAV (iNAV). Buy and sell spreads indicate inefficient liquidity.

  • Liquidity: The liquidity of an ETF indicates its market depth. It refers to the ease with which ETF units can be purchased and sold on the exchange. Higher liquidity in an ETF indicates that it is more likely to be bought and sold efficiently in the required time frame or at the desired price.