Two ETFs that track the same index can behave differently over time. The differences hide in a few technical characteristics, found in each fund's documentation. Knowing them lets you compare on objective criteria rather than on name recognition alone.
Tracked index and fees
An ETF is never better than the index it replicates. The first criterion is therefore to know what it contains: which geographic area, which company sizes, which weighting. A very broad index diversifies more than one concentrated in a few large stocks. Also check concentration: if the top 10 holdings weigh more than 30% of the index, your diversification is lower than it appears. The ongoing charges (TER) are expressed as an annual percentage and deducted automatically from the fund's value: you do not see them on a statement, they simply reduce performance. Add your broker's transaction fees and the ETF's spread. Over a long period, a few tenths of a point of difference weigh heavily.
Worked illustration (fictional)
Two ETFs track the same index, assumed to return 6% a year before fees. The first charges 0.20% a year, the second 0.70%. For €10,000 invested over 25 years, the first reaches about €40,900 and the second about €36,400, a €4,500 gap caused solely by fees. Illustrative assumptions, no promise of return.
Replication, size and liquidity
An ETF can replicate its index in two ways. Physical replication actually holds the index's securities, in full or as a sample. Synthetic replication goes through a contract with a bank, which commits to paying the index's performance: it introduces counterparty risk, even if regulated. Read the method used in the fund's documentation. Also distinguish accumulating ETFs, which automatically reinvest dividends, from distributing ETFs, which pay them out. This choice changes how capital builds up, and can have different consequences depending on your situation. The fund's assets under management, in millions of euros, tell you about its viability: a fund that is too small risks being closed and repaid at a moment not of your choosing. Trading volume and spread indicate the real cost of getting in and out. To sum up, go through these four points in each fund's documentation: the index and its concentration, the total costs, the replication method, then assets under management and trading volume.
This lesson describes a method
It points to no fund to buy. The right ETF depends on your horizon, your allocation and your risk tolerance.
Key takeaway
- ✓Compare ETFs on index, fees, replication and size, not on name.
- ✓Fees add up silently: a few tenths of a point matter over 20 years.
- ✓Very low assets under management or a wide spread make getting in and out more expensive.