EN
ETF schoolLevel 2Intermediate12 minUpdated How to choose an ETF: five things to check before you buy
First you decide what you want to own: which index, which exposure. Only after that do you compare products, and for that, five checks are enough: costs, spread, tracking difference, fund size and structure.
Starting point
First: what does an ETF's name tell you?
An ETF's name isn't a random product name. It's a label that shows you at a glance what you're buying: the issuer, the index, the regulatory framework, the currency and whether dividends are paid out. Once you learn to read the name, you've done most of the comparison.
Read the ETF's name
Hover over a part of the name or a row to see what each part tells you.
iShares Core MSCI World UCITS ETF USD Acc · View the instrument in Kvarn X →
| Part of the name | What does it tell you? |
|---|---|
| iShares | The issuer, i.e. the product provider: here, BlackRock's ETF brand. It tells you who manages the fund and how established the player behind it is. |
| Core | The product family. Core usually refers to a broad, low-cost core portfolio product, as opposed to narrow thematic or factor products. |
| MSCI World | The index the ETF tracks. MSCI World covers the large and mid-sized companies of the developed markets. This is the most important part of the name: it tells you what you're actually investing in. |
| UCITS ETF | A fund that complies with the European UCITS rules: diversification requirements, a depositary and disclosure obligations. In other words, investor protection. |
| USD | The currency of the fund or share class. It doesn't remove currency risk: the risk comes from which currencies the fund's holdings are in, not from which currency the unit is quoted in. |
| Acc | An accumulating share class. Dividends aren't paid out but reinvested within the fund. The counterpart is Dist, which pays the dividends into your account. |
The same logic applies to almost all European ETFs. When you see a name, ask in this order: which index, is it UCITS, Acc or Dist, and only then the costs. The index decides the return; the costs only fine-tune it.
Before the checks
First decide what you want to own
This is the most important step in the whole chapter, and you take it before asking about a single cost. Two ETFs that track different indices are not comparable: the cheaper one can be worse, because it owns something else. So decide on the exposure first: global or a single region, emerging markets included or not, stocks or bonds.
Only when two products track the same index does the question become one of efficiency, and for that, five checks are enough. They're covered in this order.
The entire contents of a passive ETF are determined by its index. That's why the first question isn't “which ETF?” but “which index?”. Two ETFs with similar names can track different indices and behave differently.
Eight fields that tell you everything essential. Tap a row to see what it means and what to watch out for.
Example ETF · broad world index
Illustrative example, not a real product
Anatomy of an ETF: how to read a fund factsheet
Index: World · developed
This is the most important field in the whole factsheet. The index determines the entire contents of a passive ETF: how many companies, from which countries and at what weights. Two ETFs with similar names can track different indices and behave differently.
Note: Never compare two ETFs before you know whether they track the same index.
Ongoing charges (TER): 0.12%
The annual management cost, deducted automatically from the fund's value. Typically 0.05–0.25% for broad passive ETFs.
Note: The lowest TER doesn't mean the cheapest ETF. The spread and the trading cost can end up larger if you buy small amounts often.
Fund size: €8,400 million
Assets under management. A large fund is more stable: fixed costs are spread over more capital and liquidity is better.
Note: A very small fund may be closed down, which forces you to reinvest the money, possibly at an unfavorable time.
Replication: Physical
Tells you whether the fund owns the securities directly (physical) or delivers the return through a swap agreement (synthetic).
Note: A synthetic structure carries counterparty risk. UCITS collateral rules limit it, but don't remove it entirely.
Share class: Accumulating (Acc)
Acc, the accumulating unit, reinvests dividends back into the fund. Dist, the distributing unit, pays them out to your account.
Note: In Finland, an accumulating unit defers taxation until the time of sale, which is an advantage for a long-term saver.
Domicile: Ireland (IE)
Where the fund is registered. You can see it from the first two letters of the ISIN code: IE is Ireland, LU is Luxembourg.
Note: The domicile affects how withholding taxes on foreign dividends are handled within the fund.
Tracking difference: −0.14%
How much the fund's actual return differed from the index. This includes costs and the handling of dividends.
Note: If the cheaper ETF's return gap to the index is clearly bigger, the lower cost hasn't gained you anything.
Spread: 0.03%
The difference between the buy and sell price. It doesn't appear in cost lists, but you pay it on every trade.
Note: The spread is widest when the exchange opens and closes, and when the underlying market is closed.
This is the same checklist that comes back in every comparison. Once you go through these eight points, you know what you own. The name doesn't tell you that.
- How many companies are in the index, and from which countries?
- How are the weights set: market cap, equal weight or a factor?
- How large is the weight of the ten largest? That tells you the actual concentration.
- Are there any restrictions: ESG screening, sector exclusions or currency hedging?
Accumulating or distributing?
The same index is often available in two share classes. The accumulating unit (Acc) automatically reinvests dividends back into the fund. The distributing unit (Dist) pays them out to your account.
Check 1
Total costs, not just the TER
The total cost of an ETF is made up of several parts. The most visible is the ongoing charge (TER), but trading and the difference between the buy and sell price also affect your net return.
Why even a small cost difference matters
The cost is deducted every year, so it also cuts into the base that compounding works on. The longer the investment period, the bigger the difference grows. Try below how much the costs eat out of the final amount.
The calculation is an indicative example and doesn't take taxes, inflation or trading costs into account. Actual returns vary, and historical performance is no guarantee of the future.
Look at the total cost, not just the TER
The lowest TER doesn't always mean the cheapest ETF. If you buy small amounts often, trading costs and the spread can become more significant than the TER. Compare the total cost in relation to how often and in what amounts you invest.
Three ETFs, the same index: which one implements it best?
All three track the same world index, so the exposure is identical. The difference comes only from the implementation. Look at the figures and choose which one you'd buy.
| Metric | ETF A | ETF B | ETF C |
|---|---|---|---|
| Total costs (TER) | 0.20% | 0.12% | 0.07% |
| Typical spread | 0.05% | 0.08% | 0.35% |
| Tracking difference (1 yr) | −0.21% | −0.14% | −0.42% |
| Fund size | €8,400M | €2,100M | €45M |
| Structure | Physical | Physical | Synthetic |
| Age | 11 yrs | 6 yrs | 1 yr |
Check 2
Spread: the cost you pay on every trade
For actively traded ETFs, the difference between the buy and sell price, i.e. the spread, is narrow, which reduces the hidden costs of trading. In more thinly traded products, the spread can widen exactly when the market is moving fast.
An ETF's liquidity isn't just its trading volume on the exchange, however. The participants working in the background can create and redeem units against the underlying securities, so the real liquidity comes from the underlying index. A broad world index is liquid even when a single ETF's daily volume looks small, whereas an ETF on a very narrow or exotic underlying can be thin in the background too.
Check 3
Tracking difference: does the ETF do its job?
The cheapest ETF isn't the best if it doesn't track its index properly. Two metrics tell you this.
So compare the TER and the actual return gap together. If two ETFs track the same index and the cheaper one has a clearly bigger return gap, the lower cost hasn't gained you anything.
Tracking error and tracking difference
Tracking error tells you how steadily an ETF keeps pace with its index. Tracking difference describes how much the actual return ultimately differed from the index. The smaller these are, the more accurately the fund does its job.
Deviations come from costs, the handling of dividends, index changes and the replication method. In practice, a low-cost, liquid ETF on a broad index usually tracks its index very closely.
Check 4
Fund size and age
A large fund that has been running for longer is often more stable and more cost-efficient. Fixed costs are spread over more capital, and a longer history gives comparable information on how closely the fund has tracked its index.
A very small fund can be exposed to closure. In that case, the money is returned to the investors and you have to reinvest it, possibly at an unfavorable time and at the wrong moment from a tax point of view.
Check 5
Structure and issuer
Physical replication means the ETF directly owns the index's securities. Synthetic replication delivers the index return with derivatives, typically a swap (total return swap) agreement with a counterparty.
Compare the features
Summary
Checklist before you buy
- What do I own? Which index, which region, accumulating or distributing unit. If this is unclear, comparing costs is pointless.
- Total costs. The TER is the starting point, but also look at what trading costs you each year.
- Spread. A narrow spread saves you money on every purchase. In a thin product, it can eat up the entire cost advantage.
- Tracking difference. Compare the return with the index over several years. It reveals whether the product works as promised.
- Size and age. A large, established fund is more liquid and less likely to be closed.
- Structure and issuer. Physical or synthetic, UCITS eligibility, domicile and who is behind the product.
If two products perform equally well, choose the one with the narrowest spread and the largest fund. In practice, those are the most noticeable differences for a long-term investor.
This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns. The calculators and comparisons are illustrative.
Your progress is saved in this browser.