• ETF Insights

    ETF 103: Is This ETF Right for Your Portfolio?

    18 September 2019

    When evaluating and selecting the right ETF for a portfolio, there are many important details to consider, including the ETF’s holdings, total ownership costs, and its performance in varying market conditions compared to its peers.

    ETF 101: Understanding the Basics
    ETF 102: The Inner Workings of ETF Creations and Redemptions
    ETF 103: Is This ETF Right for Your Portfolio?
    ETF 104: Getting the Most Out of Your ETF Trades
    ETF 105: Gaining Efficient Access to Bond Markets with Fixed Income ETFs

    ETF Evaluation: Looking Under the Hood

    Understanding how an ETF is constructed can provide a clearer picture of its exposure. A good place to start is by looking at an ETF’s holdings and the security inclusion process for the index it tracks. A detailed look at the underlying holdings can help investors understand if the fund suits their needs. For example, if an investor is seeking targeted exposure to a specific sector, looking into whether an ETF holds large multinational conglomerates that are involved in a broad array of businesses may factor into whether or not the ETF is the best fit.

    To learn more about an ETF’s portfolio construction, investors also should examine two critical attributes: the security inclusion rules of the underlying index,which govern what securities the fund should hold; and the fund’s allocations to the selected securities. In particular, it is important to take a closer look at the degree to which the underlying holdings are concentrated or diversified; both approaches have benefits and drawbacks depending on an individual’s risk tolerance and investment goals.

    Tracking the Competition

    Evaluating an ETF’s performance can include looking at the fund’s performance both on its own and in comparison to peers or an underlying index. Performance over time can provide valuable insights into how the fund has fared under different market conditions. Assessing performance against its peers can provide insights into how similar investments with relatively small differences in security selection processes, exposures, or allocations may react to changes in the market.

    Performance can also be measured against its underlying index. Total return difference is a measure of how closely an ETF performs relative to its index. Many factors can influence an ETF’s total return difference, such as the normal operation of a fund, the liquidity of an ETF’s underlying holdings, or a foreign market’s trading hours. For example, a discrepancy may develop between the index returns and the ETF’s net asset value (NAV) if a U.S.-traded ETF holds securities that are traded overseas and one market is open while others are closed.

    Evaluating an ETF’s performance can include looking at the fund’s performance both on its own and in comparison to peers or an underlying index.

    A small total return difference that is close to the expense ratio is normal, while a large difference beyond that may warrant further investigation. However, keep in mind that total return difference can vary widely from one type of ETF to another. For example, U.S. equity ETFs generally track their indexes relatively tightly, while international ETFs and fixed income ETFs can experience higher tracking discrepancies due to a variety of factors.

    ETF Expenses: What It All Costs

    The total cost of owning an ETF encompasses:

    Fund expenses. Also known as the ETF's expense ratio, is often the only explicit cost investors are able to compare, and can sometimes assume an outsized importance when evaluating ETFs. While low fund expenses can seem like an obvious plus, it is important to remain aware of the kind of performance or exposure that accompanies the low fee. For example, an ultra-low-cost ETF that cannot deliver solid performance or the desired exposure may not be the best choice.

    Trading costs.  These can include commissions, liquidity, and bid-ask spreads.2

    • Commissions are the fees investors pay to buy or sell ETFs—these vary widely depending on the individual brokerage, with some offering commission-free trading for select ETFs. 
    • The liquidity of the underlying holdings also has a large influence on trading costs, because some securities are more liquid than others. For example, an ETF that holds a basket of extremely liquid large-cap domestic companies will typically have lower bid-ask spreads, and therefore tends to be easier to trade in a cost-effective manner. On the other hand, an ETF that deals in more difficult-to-trade securities such as thinly-traded bonds or foreign equities will tend to experience higher bid-ask spreads and elevated trading costs, which may impact ETF returns.

    Portfolio turnover and rebalancing.To remain in line with their respective indexes and ensure their underlying securities are held in the correct proportions, ETFs must periodically rebalance their holdings.The more frequently they rebalance, the higher the portfolio turnover. ETFs with higher portfolio turnover may incur elevated trading costs on the underlying securities, which can detract from returns.

    Capital gains. Although ETFs are known for their tax efficiency, some types may still generate tax liabilities for shareholders in the course of their operations. The fund provider’s website should specify whether the ETF has made taxable distributions, and if so, how much.

    Key Takeaways

    Evaluating ETFs is a critical skill for ETF investors. By taking a closer look at how an ETF delivers exposure and taking the time to understand performance, underlying holdings, and ownership costs, you should be well-equipped to choose the right ETF for your needs.


    This applies to passive ETFs. Active ETFs do not track an index, and in such cases it is important to pay especially close attention to the fund prospectus to learn more about the security selection process.
    Bid-ask spreads: The distance between the “bid” (the amount an investor is willing to pay to buy a security) and the “ask” (the amount an investor is willing to accept to sell a security).
    Rebalance: The process by which an ETF brings its underlying holdings back into alignment with its index.
    This does not apply to actively-managed ETFs, which do not track an index.

  • Important Disclosures

    This commentary originates from VanEck Investments Limited (“VanEck”) and does not constitute an offer to sell or solicitation to buy any security.

    VanEck’s opinions stated in this commentary may deviate from opinions presented by other VanEck departments or companies. Information and opinions in this commentary are based on VanEck’s analysis. Any forecasts and projections contained in the commentary appear from the named sources. All opinions in this commentary are, regardless of source, given in good faith, and may only be valid as of the stated date of this commentary and are subject to change without notice in subsequent versions of the commentary. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of VanEck. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.

    No investment advice

    The commentary is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This commentary has been prepared by VanEck as general information for private use of investors to whom the commentary has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.

    Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor.

    Forecasts, estimates, and certain information contained herein are based upon proprietary research and the information contained in this material is not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities or gain exposure to such sectors.

    Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.


    This commentary may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from: VanEck portfolio managers, analysts or representatives, publicly available information, information from other units or Companies of VanEck, or other named sources.

    To the extent this commentary is based on or contain information emerging from other sources (“Other Sources”) than VanEck (“External Information”), VanEck has deemed the Other Sources to be reliable but neither the VanEck companies, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.

    Limitation of liability

    VanEck and its associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. In no event will VanEck or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report.

    Risk information

    The risk of investing in certain financial instruments, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments. 

    Conflicts of interest

    VanEck, its affiliates or staff of VanEck companies, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in this commentary.

    To limit possible conflicts of interest and counter the abuse of inside knowledge, the representatives, portfolio managers and analysts of VanEck are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of VanEck and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. This commentary has been prepared following the VanEck Conflict of Interest Policy. 

    Distribution restriction

    This commentary is not intended for, and must not be distributed to private customers.

    No part of this material may be reproduced in full or in part in any form, or referred to in any other publication without express written permission of VanEck. ©2019, VanEck.

    Index Descriptions

    All indices named in the commentary are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.


    VanEck Vectors UCITS ETFs plc. is an investment scheme which is registered in Ireland and which, as an umbrella fund, is subject to the European regulation of collective investment schemes under the UCITS Directive. The sales prospectuses for the VanEck Vectors UCITS ETFs contain a comprehensive description of the risks and conditions governing the fund. The sales prospectus, the Key Investor Information Document (KIID), the Articles of Association and the current annual and semi-annual reports are available free of charge from the following agents, contact details of whom may be found on www.vaneck.com.

    UK: Facilities Agent -- Computershare Investor Services PLC
    Germany: Information Agent -- VanEck (Europe) GmbH
    Spain: Designated Distributor -- Allfunds Bank S.A.
    Sweden: Paying Agent -- SEB Merchant Banking
    Swiss Represent: FIRST INDEPENDENT FUND SERVICES LTD, Klausstrasse 33, CH-8008 Zurich
    Paying Agent: Helvetische Bank AG Seefeldstrasse 215, CH-8008 Zurich

    In respect of the Shares distributed in Switzerland to Qualified Investors, the place performance and the place of jurisdiction is at the registered office of the Swiss representative.