Find the Right ETF
💡Take Away
Particularly important criteria for selecting an ETF include its
costs,
fund size
- A threshold of €50 million is considered sufficient.
- Over €100 million is considered stable.
- Over €150 million is a safe benchmark for larger funds.
replication method
You can find this information in the ETF factsheet, on the provider’s website, or conveniently in our ETF search.
Knowing the tracking difference can help with selection. The distribution type is also part of the selection process based on personal preference.
Fund domicile and currency have less impact when choosing an ETF but can still serve as decision-making factors.
👉 How to Proceed
- Use the search function at your broker or in ETF search to find suitable ETFs. Filters help narrow down the selection.
- Then, compare the key facts listed in the factsheets or ETF search results.
- Once you’ve chosen an ETF, you can buy or set up a savings plan for it using its ISIN at your broker, making it part of your portfolio.
Fund Volume: Bigger is Better
The term “fund volume” describes how much money is invested in an ETF.
- A fund volume of €114 million means that a total of €114 million is invested in that ETF.
- The fund volume indicates how established the ETF is in the market—the larger, the more established.
- For ETFs tracking large global indices, the key threshold is around €100 million.
The larger an ETF, the more profitable it is for the provider. This can also benefit investors in terms of lower costs.
If an ETF does not perform as expected, the provider may remove it from the market. In such cases, investors are informed in advance (with a six-week notice period), allowing enough time to reallocate funds. -> So, no need to panic.
However, a small fund volume is not necessarily a disadvantage.
- Many niche ETFs, though small, still perform well and remain profitable for providers.
- A threshold of €50 million is considered sufficient. In general, a fund volume of over €150 million is a safe benchmark for larger funds.
Costs & Fees of ETFs
The costs of an ETF consist of
transaction costs for buying and selling shares
- Occur once when buying or selling and depend on the brokerage account
- Some brokers offer commission-free ETFs, while others charge a flat fee or a percentage-based fee
- Some brokers may charge an account management fee
the Total Expense Ratio (TER) of the ETF
- Charged by the ETF provider and can be found in the ETF factsheet
- Represents the total annual costs of an ETF, covering the fees the provider deducts directly from the fund volume to cover expenses
the spread as a price factor
- The difference between the bid and ask price
- It can become a significant cost factor, especially outside official trading hours and on weekends.
ETF savings plans have significantly changed cost structures. Compared to traditional order fees, they are often much more cost-effective for retail investors 👏.
Accumulating or Distributing?
If an ETF holds dividend-paying stocks or a bond ETF receives interest, there are two distribution methods to handle these earnings:
- Accumulating (reinvesting): The ETF automatically reinvests the received dividends or interest, allowing the invested capital to grow.
- Ideal for long-term investors who want to grow their capital through the power of compound interest.
- Distributing: The ETF pays out the dividends or interest directly to investors.
- Suitable for investors looking to generate a regular passive income from their investments.
Utilizing the Saver’s Lump Sum with distributing ETFs
By smartly distributing investments across both types of ETFs, one can invest in a tax-optimized manner. For all the important tax aspects of ETFs, check out guide on ETF & Taxes.
Overview of Replication Methods
The principle of ETFs is to replicate a specific index as accurately as possible, which is known as replication.
Common replication methods are
physical (full) replication
- Replicate the index by holding physical securities in the same proportions
- This is advantageous because it can most accurately reflect the values.
optimized sampling
- Securities are also physically bought, but only the most important ones. Which ones are selected is determined by the sample.
- This is particularly beneficial for ETFs with many securities.
- This method helps reduce costs.
synthetic replication (swap ETFs)
- Replicates the index using swaps (exchange transactions)
- Mainly useful for niche markets and commodity ETFs
- Sometimes, these replication methods are also combined, with larger positions held physically and smaller ones replicated synthetically.
Tracking Error and Tracking Difference: Deviation from the Index
One criterion for evaluating the quality of an ETF is the Tracking Difference
Measures the difference between the ETF’s performance and its benchmark index over a specific period
Can be positive (meaning the ETF outperforms its index) or negative
Various factors contribute to the Tracking Difference, including general costs, the replication method, and differences in withholding tax between the ETF and the index.
Although Tracking Difference and Tracking Error are often confused or used interchangeably, they represent different metrics!
Since the Tracking Difference does not show actual costs but rather opportunity costs (i.e., the theoretical lost returns), the Total Expense Ratio (TER) remains the primary cost metric for private investors.
Tracking Error vs. Tracking Difference
| Metric | Definition | Focus | What It Measures | Ideal Scenario | Influenced by |
|---|---|---|---|---|---|
| Tracking Difference (TD) | The average difference between the ETF’s returns and the index’s returns over a period of time. | Long-term deviation | Measures the ETF’s overall performance compared to the index -> Shows whether the ETF outperforms or underperforms its benchmark. | Should be low and stable, ideally close to 0 or slightly positive. | Fees (TER), taxes, and reinvestment strategies. |
| Tracking Error (TE) | The volatility (standard deviation) of the ETF’s return deviations from the index’s return. | Short-term fluctuation | Measures how volatile the ETF’s tracking is on a daily, weekly, or monthly basis (using standard deviation) -> Measures how consistent the ETF is in tracking the index. | Should be as low as possible, indicating stable tracking. | Liquidity, market impact, and trading costs |
Low TD + Low TE = A high-quality ETF ✅
Low TD but high TE: The ETF tracks the index well over time, but with significant short-term fluctuations 📈.
High TD but low TE: The ETF is stable but consistently lags behind the index (likely due to high fees).
For long-term investors, TD is typically more important than TE. However, if TE is too high, it may indicate that the ETF is not reliably tracking the index.
The Role of Currencies in ETFs
A currency often appears in the name of an ETF, such as EUR or USD. This is the fund currency, meaning the currency in which the fund’s assets are managed. However, the settlement is always done in the currency of your broker, so with a German broker, it would be in euros.
Due to the investment in securities in foreign currencies, there is a certain currency risk.
- This reflects the possibility that the home currency’s exchange rate may rise relative to the foreign currency, thus reducing the value of the shares.
However, when investing in many ETFs (such as global ETFs), there is already strong diversification (including in terms of covered currencies). -> Currency risk often becomes a zero-sum game, and additional insurance only reduces returns.
The Fund Domicile
You can find out the so-called fund domicile by checking the ISIN, i.e., the International Securities Identification Number.
- The first two letters indicate the fund domicile, for example, “DE” for Germany or “IE” for Ireland.
Most funds are established in Luxembourg or Ireland.
- Luxembourg has long been established as a fund location, which is particularly advantageous for institutional investors.
- Ireland offers slight tax advantages for certain securities transactions with the USA, which is why it is also an established fund domicile.
However, overall, it can be said that the significance of the fund domicile has strongly diminished for German investors, as German funds are no longer given tax preference. Only ETFs with a non-European fund domicile can cause difficulties, but these are rarely or never offered by German brokers. 🙄
Using the ETF Search Tool
ETF search from Finanzfluss
Which ETF is right for me?
The factsheets can be very helpful
- They always include key information such as the performance of the benchmark index or the fund volume
- They are kept up to date
It is always advisable to check with the factsheet or other documentation from the provider.