The most important qualities of the best ETFs to buy include low MERs and “passive” management.

We advise investors to downplay or avoid stocks that are in the broker/media limelight. This applies to a variety of investments such as exchange traded funds (ETFs) that hold those stocks. These investment innovations appear in the broker/media limelight for all the usual (negative) reasons.

However, the best ETFs to buy will provide you with much more than just significant media attention.

The media may try to tell you about the best ETFs to buy, but we think you should focus on other qualities

From the media point of view, ETFs overall come with a good story: you can save money because they come with much lower fees than conventional mutual funds, plus there’s news to report, since new ETFs are coming out all the time.

From the broker point of view, the media attention makes ETFs easier to sell to clients. In addition, new issues of ETFs set up to capitalize on a “hot” theme are coming out all the time, and brokers are happy to sell them to you.

ETFs come in a wide variety. Some offer convenient, conservative, low-fee opportunities and are of use to many investors. Others are so specialized, or based on such a thin scrap of investment rationale, that they don’t really belong in anybody’s portfolio.

When financial institutions create some new ETFs for brokers to sell to investors, they use the most time-tested of standard marketing techniques: they portray the features of these new ETFs as benefits. To make sound investing decisions, however, you need to look at these supposed benefits with a healthy sense of skepticism. You need to decide if the underlying features actually represent a benefit for you.

The characteristics of the best ETFs to buy

The best ETFs have lower MERs: The MERs (Management Expense Ratios) are generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing their portfolios, these ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.

The best ETFs to buy practice “passive” fund management: The best ETFs practice “passive” fund management, in contrast to the “active” management that conventional mutual funds or some new ETFs provide at much higher cost. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

Look for ETFs that are broadly diversified: Knowing the broad diversification of an ETF will help you determine its volatility. The broader the ETF, the less volatility in general it will have.

Know when to act on the best ETFs to buy

Some investors decide when to buy an ETF with the help of technical analysis—the process of analyzing a stock’s past and historical price movements to attempt to determine future prices.

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

We find it encouraging if the two seem congruent, and they usually do. But sometimes one contradicts the other, and that’s when we 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, even 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.

New investment products hit the market often with strong promises. Some of the new ETFs are an example of this. Have you invested in any new ETFs with favourable results, or do you prefer the traditional ETF investments for your portfolio?

Have you bought into new ETFs with a narrow “hot” only to regret it later? When did you realize your mistake?