Investing in Exchange-Traded Funds (ETFs) can be a fantastic way to grow your wealth over the long term. They offer diversity, liquidity, and often come with lower fees compared to traditional mutual funds. If you’re considering investing in an S&P 500 ETF or any other ETF for the long haul, you’ve come to the right place. We’ll show you how to pick the best one in just a few simple steps.
Step 1: Start with an ETF Screener
To make an informed choice, you need the right tools. Luckily, there are many great ETF screeners available online. For example, websites like ETFdb.com for US ETFs or JustETF.com for EU ETFs can provide you with valuable insights. These screeners allow you to filter and sort through a vast number of ETFs based on your criteria.
Step 2: Define Your Theme
Decide on your investment theme. Are you interested in large-cap stocks like the S&P 500, technology, or perhaps emerging markets? Knowing your theme will help you narrow down your search.
Step 3: Sort by AUM
AUM stands for Assets Under Management. In simple terms, it tells you how much money is invested in a particular ETF. Sorting ETFs by AUM is a good way to gauge their popularity and liquidity. A larger AUM often means tighter spreads and lower trading costs.
Step 4: Pick the Top 1-4 ETFs by AUM
Once you’ve sorted the ETFs by AUM, select the top 1-4 options. These are the heavyweights in the ETF world for your chosen theme. It’s usually a good sign if many investors have entrusted their money to these funds.
Step 5: Check Expense Ratios
Now that you have your shortlist, it’s time to look at expense ratios. The expense ratio is the annual fee an ETF charges as a percentage of your investment. Lower expenses mean more money stays in your pocket. Choose the ETF with the lowest expense ratio from your shortlist.
Step 6: Make Your Choice
Congratulations, you’re ready to invest! You’ve picked an ETF with a low expense ratio and strong assets under management, which means you’re likely to enjoy lower costs and increased liquidity.
Example: Choosing a US S&P 500 ETF
Let’s say you’re interested in investing in the US S&P 500, a popular choice for many long-term investors. Here’s how you can use the steps above:
– Start with an ETF screener like ETFdb.com.
– Define your theme, in this case, the S&P 500.
– Sort by AUM to find the most popular S&P 500 ETFs.
– Select the top 1-4 by AUM. For instance, you might end up with SPY, IVV, and VOO.
– Check the expense ratios. Drop SPY off the list, since it has a higher expense ratio compared to IVV and VOO.
– Lastly, choose between IVV and VOO, as they have similar expense ratios and AUM. You can even look at their past returns and any tracking errors to make your final decision.
In this example, you’re left with IVV and VOO. Both are excellent choices for long-term investment: they’re cost-effective, have significant AUM (making them more liquid), and are managed by reputable organizations.
And there you have it – a simple and effective guide to choosing the perfect S&P 500 (or any other) ETF for your long-term investment journey. Happy investing!
Dominic Feron 