Step-by-step guide on how to find the best ETF (exchange traded funds) to invest in 2020
FOMO (fear of missing out) in current times, when US and global stock markets are soaring, tops the list of emotions generally seen in any investor. Should I invest right now? If I don’t invest, I will loose those thousands or millions I can earn like my colleague earned in just last 6 months? How could I miss buying Tesla stock when all my friends / colleagues bought it and now have almost $100k profit in their account? I missed buying Zoom stock and yesterday I read that Zoom’s CEO and Li Ka Shing have become billionaires just with that one stock? Oh my god, why didn’t I invest in GOLD when all my life I thought of investing at least in Gold, if not in any other asset class? But what if the market falls now since its seems it’s already at it peak?
Do these questions keep popping in your mind every now and then? You need to start investing but where and how to start? You fear buying Tesla / zoom / FAANGM stocks now because of their recent run up.
Apart from direct stock investment, there are 2 common types of investments for retail investors: Mutual Funds (or Unit Trust) and Exchange Traded Funds (ETFs).
Instead of boring you with the introduction, description and a whole long list of differences between MF and ETF, I will rather list down in the next section the fundamental differences most vital for a retail investor.
I have also written a detailed post on ETF advantages and disadvantages.
- Most Mutual funds are actively managed while most ETFs just track an index.
- MFs have higher fees than ETFs: management fee, expense ratio, Sales charge or Commission. Some MFs even have a mother fund management fees.
- MFs generally have higher turnover than ETFs — just because most MFs are actively managed, the fund manager typically can choose where to invest your money and therefore keeps shuttling your money between equity (buy/sell different stocks) and debt (or cash). His aim is to get the best gains for his fund and in-effect for you, the investor. This results in lots of brokerage and other charges associated with buying and selling securities (equity and debt).
- MFs generally pay higher dividend than ETFs. It depends whether a dividend appeals to you or not and whether you are a US resident or not. More on that later
- MFs have stricter regulations imposed by the SEC (other regulators for global funds).
- ETFs generally have higher volatility which means higher risk but also higher returns. Its common to find few ETFs with more than 100% return in last 1 year, and many with more than 50% returns in the same time. However only a handful of MFs would give 50% or more 1 year returns
Following is a detailed list of differences as found on investopedia:
I have split this post into 2 parts: This post is the first post out of a series on how to create the best diversified ETF portfolio using the best US listed exchange traded funds (ETF). This one is an introduction to the process I followed to identify the best available ETFs tradable in US market, while the second post provides more details on the process of creating your own ETF portfolio along with several examples of sourcing data / information from multiple websites.
You may go to the second part directly by clicking here.
How I chose which ETFs to pick for my long term investment?
Every investor has at least 2 ways to select where to invest his hard-earned money (apart from direct stock investments): guidance from his investment advisor, or lots of analysis & research all by himself.
I chose to do some analysis using publicly available data on MFs and ETFs traded in US and other geographies.
Since I live in Singapore, its easy for me to invest both in a developed market like the US and in emerging markets like India & China. Singapore gives one an immense benefit of being able to invest in instruments traded in most countries (at least the world’s top economies) with least regulatory restrictions.
I couldn’t gather all information for a careful detailed analysis on a single website. So I surfed a few websites for different parts of my research and and compiled them to finalize my list.
Following are the steps I followed to create that list.
A. Download the entire list
- I downloaded the list of ETFs as CSV from FundSuperMart.
- I combined the data in the Performance and Info CSVs using MS Excel vlookup() to ensure I do not mix up the returns and details of one ETF with another.
Since I live in Singapore, I am allowed to trade only specific ETFs as regulated by Monetary authority of Singapore (MAS). FSM, Interactive Brokers and Saxo markets Singapore have the most comprehensive list of MAS allowed tradable ETFs.
FSM has an extremely simple interface with an option to download the list in a CSV format. I use this initial list to “eliminate” the worst ETFs. Thereafter I will filter the list based on several criteria by further researching using other websites to finalize the list.
If you go through the entire post, you will see that I have provided examples from many different websites, not just FSM or Morningstar or Yahoo finance. For example, you can get annualized returns from any popular website but I have given an example where you can calculate annualized return between any 2 dates given your investment as a single initial purchase or a periodic purchase.
B. Throw away the rubbish
Let me not call it rubbish but something which I don’t want to focus on right now. Remove unwanted columns of information and then filter down the list initially based on few parameters like returns, category, geography, sector etc.
Following is a screenshot of the original list in MS Excel. Roughly 2250 ETFs.
Now you may select your own preferences to filter down the list. The following are my preferences and that’s how I filtered it down.
- Remove Leveraged/inverse ETFs
- Choose only USD and HKD as currency
- Remove all ETF which are less than 1 year old. You can find that out by seeing if an ETF has a 1 year return column blank or not.
- “Prefer” ETF which are more than 1 year old.
C. Elimination based on Category, Sector, Geography
From the initial list, I filtered first on each and every Category-Sector-Geography mix and removed all ETFs which had 1 year returns falling in the “below average” section. To do this you can use a simple excel filter.
There are roughly 5 categories, 38 sectors and 59 geographies in the initial list (an excerpt below)
Manually, first I chose category = Equity, sector = Energy, Geography = US. Then I ran the excel filter to delete ETFs with below average 1 year return. Then I changed the geography selection to Global (next one in the list) and repeated the process.
A possible question from many readers: Why didn’t you run a simple macro to create the filtered final list? Its very easy to create and run a VBA macro to do that silly simple stuff.
Answer: With this exercise I wanted to get a feel of current global ETF market. Since I ran that step manually enabling me to glance at all ETFs, I could actually gauge how different markets and funds are performing in reality vs. what I expected based on global news and perceptions.
This way, I ensure I do not mix up return expectations of an Equity fund in US vs. an Equity ETF in India/China or even Egypt for the sake of clarification. The same case applies to not mixing up US-Energy ETFs vs. US-Consumer vs. US-Technology ETFs. Since we all know FAANGM is the talk of the town since last 1 year, there’s no point asking the consumer staples ETF to even try to match 1 year returns of the US-technology ETF.
Tip → Most ETFs offer Dividends and have different expense ratio. If you want to have even clearer differentiation based on 1 year returns, you can add the dividends and subtract the expense ratio from 1 year returns. This is best applicable to Fixed Income funds where dividend and expense amount is a substantial part of total annual return. E.g. See below for a popular US based Fixed Income fund’s returns with dividend, expense amount and effective total 1 year returns.
Following screenshot shows an excerpt from the list I got after filtering for Equity — Consumer funds.
Thereafter I filtered on Geography and selected US to pick the best US — Consumer funds. Then I repeated the workflow for Geography = China and then Geography = Global.
Now believing in evergreen US consumer staples market and in growing consumer discretionary (term for classifying goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them) market is fine but if you really want to leverage on world economic growth as well as diversify away from only US-focused investments, you should invest in the other large economies’ consumer funds as well. My personal belief has always been to diversify with heavier weight on US market, then China/Emerging, then global.
This way I came up with a narrowed down “better performing” ETFs list for each Category-Sector-Geography permutation.
D. First level selection using visual observation based on parameters like annual & total returns, fund size (AUM), risk rating
One-by-one I carefully went through each selected ETF keeping in mind my aim of 1 year return > 25% (apart from fixed income ETFs) and 3 year annualized return of > 15% at the lowest possible Risk rating. As an example, lets begin with the first sector and category on the list. I select Category = Alternative Investments, sector = Alternative Investments — Asset Allocation.
Asset Allocation is generally a fancy name for balanced / hybrid funds. So seeking a return of > 25% will be futile. However the first fund on the list, NTSX, has a risk rating =10 (yellow highlighted column header), which I don’t think is worth looking at. Why? Because I can find funds with better returns for a risk rating of 10 in other categories/sectors. I mean I have the entire world to invest so why just keep my hands tied to Alternative Investments — Asset Allocation.
The blue text-colored funds in my list are the ones which are less than 3 years old. I have not removed those from my list but have rather colored them blue just to evaluate them along with other long-running funds but with a pinch of salt.
The 2 largest funds in this sector are FV and AOA (2nd and 3rd in the list above). So I text-colored their ETF Name column green to keep an eye.
Similarly, let’s see for Category = Equity, sector = Consumer.
Based on my analysis as described above I decided to proceed in my further analysis with top 4 Consumer ETFs from US (FDIS, VCR, RTH, XRT), 2 from China (CHIQ, CHIS), and 2 from Global (GENY, CARZ).
I left out ECON from Emerging Markets geography because it has negative / low 3 year and 5 year returns. Even though XLY is the possibly the largest fund (based on AUM or fund size) in this sector, I deliberately left it out reason being I can find better funds (e.g. FDIS, VCR, RTH) for a risk rating of 10.
I simply make the text under ETF Name column as green-colored for ETFs selected (based mainly on Risk rating vs. returns) for identification in such a huge list. I call this list as “ETF 1.0"
Now, I will show you how to use several other websites to get detailed information and statistics not commonly found. I also use my broker’s demo accounts as well as visual inspection using charts (both individual and comparative plots).
E. Now comes the hard part — selection of the few best ETFs to invest my hard earned money.
The websites I used for further analysis are ETF Screen, ETFdb, etf.com, dqydj.com, markets.ft.com etc. I also used my demo accounts with Interactive Brokers & Saxo markets to check ETF parameters, live spread, tradability, regulatory restriction, limit, margin and so on.
- Start with a category+sector+geography combination e.g. Equity-Consumer-US.
- Out of the ETFs selected in previous sections (ETF 1.0) for above combination, I carefully evaluate each ETF by:
- Examining parameters like historical volatility, Lipper & Morningstar ratings, MSCI ESG Analytics ratings, expense ratio, beta, standard deviation, apha etc. from morningstar.com, markets.FT.com or my interactive brokers account.
- Comparing 3 or 5 year performance of automated periodic investment (SIP)
- Visually observing their 1y — 5y chart on FSM chart center website
3. This way I get a curated list of all best performing ETFs out of the total universe tradeable in Singapore. Next, I compare selected ETFs based on relative strength and correlation to choose the better ETFs out of a few within same category+sector+geography combination.
4. Since my plan is to invest (lumpsum and periodic investment), no short term trade, I further analyse selected ETFs on at least these 2 points:
- ETFs mirroring my preferred ones while having lower NAV for systematic periodic investment
- ETFs having lower lot size / minimum units to trade
5. Lastly, before investing, I form a portfolio and backtest it through the following methods:
- download preferred ETFs’ last 5 years (or since inception if less than 5 years old) daily price data from Yahoo finance and run excel simulator to generate the best backtested portfolio.
- for a visual check, I plot my portfolio on www.tradingview.com e.g. plot a portfolio of a combination of ETFs e.g. (ARKW*2 + VIXM) to see performance over several years.
Instead of taking a deep dive here and to rather keep this post simple yet broadly informational, I will further elaborate all this with several examples and links to many useful websites in the next part of this post.
In the next post in this series I will talk more about the most optimal portfolio based on my asset allocation.
I created this as a part of a series of investment knowledge posts. All with the sole intention of sharing my knowledge and experience in
- searching for good quality investment vehicles
- analyzing and researching on choosing between various options from those
- finding an easy, scalable and manageable way to invest in those
- creating and managing my own portfolio while trying to find a balance between investment expectations, regulatory hurdles and reality
- ensuring the portfolio is in accordance with general asset allocation principles as per my age, investment amount and risk appetite.
Disclaimer: At the time of writing this post, I personally have only 1 Regular Savings Plan ($100 monthly) with FSM, 1 live Interactive Brokers with only $350 worth of securities and 1 demo Saxo markets account. I use my demo accounts for research.
