When deciding which ETFs to invest in, follow these criteria for maximum success

ETFs aim to provide broad market exposure with low cost and our Best ETFs for Canadian Investors advisory covers ETFs like no other publication in North America.

Notably, we recently released our top ETF to buy in 2024 in this newsletter. However, you’ll need to subscribe to find out what that top ETF to buy in 2024 is!

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This ETF offers a solid 1.4% yield, while at the same time charging you a very low 0.0945% MER. Going forward, the fund—and its investors—should gain from an expanding U.S. economy. Plus, the ETF’s U.S. dollar exposure provides valuable currency diversification for Canadian investors; that’s a long-term positive.

When it comes to ETFs, we take a close look at the following criteria.

6 Important considerations for choosing ETFs to invest in:

1. Know how broad the ETF’s stock holdings are, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF, like one that tracks resource stocks, may be more volatile.
2. Know the economic stability of countries that an international ETF invests in. It’s also worth mentioning that foreign leaders may not be your ally when it comes to passing laws or imposing regulations that can affect your investments
3. Know the liquidity of ETFs you invest in, look at the volume of shares that trade hands on a daily basis.
4. Consider buying ETFs in a lump sum rather than with periodic small amounts, so you can cut down on brokerage fees.
5. ETFs can still be volatile, even with the diversification they offer.
6. Don’t invest in ETFs that show wide disparities between the stocks they hold and the investments that the sales literature describes. Despite the increased attention for ETFs, many ETF managers continue to describe their investing style in vague (or sometimes misleading) terms.

Meanwhile, rather than using the six criteria above, some investors decide when to buy an ETF using technical analysis.

Technical analysis is a useful tool, in deciding when to buy ETFs, but only if you recognize it as one of many tools. Before making any recommendations or transactions in client accounts, I always look at a chart. However, I don’t look at the chart for a prediction of what’s going to happen. I look to see if the pattern on the chart seems to support the view I’ve formed of the stock/ETF based on its finances and other fundamental factors.

I find it encouraging if the two seem congruent, and they usually do. But sometimes one contradicts the other, and that’s when I know I have to dig deeper, and perhaps wait until the situation clarifies itself.

After all, there’s a large random element in all stock price changes, including for ETFs, especially in the short term. When you focus on timing buy and sell decisions to improve your investment results, you are trying to come up with a system that can outguess a random factor. But a random factor is something you can’t outguess.

You can, however, offset the random factor indirectly, by taking advantage of our three-part Successful Investor approach. And you can enhance our approach with a simple-but-not-easy tactic: Get used to the idea that when you decide to include a new investment in your portfolio, you should buy even while there’s still some doubt in your mind.

If you wait to buy an ETF until you are sure it will pay off for you, you’ll probably pay a higher price. You are better off to buy sooner—when you are “pretty sure,” rather than “certain.”

That’s because by the time you’re sure an ETF is a good buy, many other investors may have come to share that opinion. This is another way of saying that investor expectations have risen. That usually means the ETF has used up some of its immediate potential for gain.

What rules do you follow when picking ETFs to invest in?