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Trading history/volume/spreads

Higher average daily volume (i.e. number of shares traded) is better — it can prevent a fund from being whipsawed by a few large buyers or sellers, and also ensures that you can enter or leave a position at will. Watch out for low trading volumes as they can result in higher spreads, which are added cost when buying and selling ETFs.

Concentration

Not to be confused with the concentration risk concept in asset allocation (i.e. too many tech stocks), ETF concentration references the number of and exposure to single stocks within the ETF. Many ETFs have highly concentrated positions, and no matter how low the fee, you do not need to pay it if the exposure can be replicated by owning a few stocks on your own. If say, 60 per cent of holdings are in the Top 10, that is all that is going to really matter at the end of the day, especially considering the fact that correlations of the other assets in the fund are still likely relatively high. This is a big problem in Canada — healthcare, financials, tech and consumer sector ETFs are all dominated by a few holdings. For example, XIT, the Canadian infotech ETF, has 77 per cent of its assets in just four stocks. For just owning these, and a few others, it still charges a fee of 0.60 per cent.

ETFs are a great solution for do it yourself investors who want low fees and diversification. With so many funds to choose from, there is no need to buy a ‘bad’ ETF, so keep these points in mind for your next purchase.

Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors. Don’t miss his special Financial Post webinar on Oct. 24th, where he discusses the markets and what he has learned over 30 years in the investment industry. You can sign up for free here.