Choosing the Right ETF Index is Key

Morningstar's Jose Garcia-Zarate explains why selecting the right index is key to picking the investment strategy that's right for you

Jose Garcia Zarate 17 May, 2019 | 11:50AM
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Jose Garcia-Zarate: With more than 2,000 exchange traded products available for sale in Europe it’s no wonder that investors find the task of ETF selection challenging.   We at Morningstar are doing our bit to help with our Analyst Ratings.  These are designed to identify the best strategies within a Morningstar category. In the case of ETFs, the investment strategy is defined by the index.  And so, identifying the right index is the first and most crucial step in the ETF selection.  

There are many ETFs that track the same or similar index but typically we’ll find differences in price, domicile or replication methodology.

Which one is the best ETF for me? That’s a question that only each individual investor can answer. 

You may prefer a replication method – physical or synthetic – or a fund’s domicile.  Sometimes you may be looking for a fund that distributes dividends or one that offers returns hedged into a particular currency. Perhaps you prefer funds that don’t engage in securities lending. All these are factors that would help you narrow down the selection. 

Otherwise, price is generally a good guiding light. Fees eat into returns, and so the lower the amount we must give up each year, the higher the chances of maximising returns. 

Selecting ETFs involves many considerations, but the most important thing is to get the index right and then work from there.

For more insight and commentary on the European ETF market, please check out our wide-ranging guided tour of the European ETF marketplace.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Jose Garcia Zarate

Jose Garcia Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe

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