Getting startedBeginner

What is an ETF

An ETF is a fund whose shares are traded during the session. It allows you to buy a basket with a single operation, but the word ETF does not guarantee diversification, low risk or a good price.

3 min read Practical guide

By the end

You will know how to compare two ETFs beyond their name and advertised commission.

What do you own?

Each participation represents a part of the fund's assets. An ETF can track a broad index, sector, bonds, or even a single leveraged stock. Review index, methodology, positions and concentration; Two products with similar names can pose very different risks.

NAV, price and creation mechanism

The net asset value (NAV) reflects the net assets per share. Authorized participants create or redeem large blocks and help keep the price close to NAV, although in tight markets there may be higher premiums, discounts and spreads.

Example

An ETF is worth €100 per NAV but trades at €101. That 1% premium is an additional cost if it disappears after you purchase.

Total cost

The annual commission is not the only cost: it adds spread, tracking difference, taxes, currency exchange and possible broker commissions. The tracking difference shows what really separated from the index after costs and frictions.

Index and replication policy.

TER and tracking difference.

Size, volume and spread.

Address, currency and treatment of the dividend.

When it provides diversification

A global fund can spread business risks, but will remain exposed to the market. Several technology ETFs can repeat the same positions. Look at the overlap and actual weights, not the number of products in the portfolio.

From data to a decision

Does the basket improve your portfolio?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

It reduces concentration with reasonable costs, replication, and liquidity.

Adverse reading

It duplicates existing holdings or hides concentration behind an attractive name.

Required confirmation

Review top ten holdings, weights, index, and tracking difference.

Reasoned example

Two technology ETFs may share eight of their ten largest holdings: owning both does not mean diversification.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

1Read the index, selection method and rebalancing rules before looking at returns.
2Check top-ten weights, sectors, countries and currency exposure.
3Add TER, tracking difference, spread, commission and taxes to estimate total cost.
4Compare replication, domicile, securities lending, size and liquidity with equivalent options.

Review questions

What exposure are you actually buying?
Is concentration hidden beneath many holdings?
Has the ETF tracked its index after all costs?

Worked case

Two ETFs that track the same index

ETF A charges 0.12%, has a spread of 0.04% and a tracking difference of −0.16%. ETF B charges 0.07%, spread 0.25% and spread −0.20%. For a short sale and purchase, A may be cheaper despite its higher TER.

Then check replica, address, currency and concentration. A sector ETF with 35% in a company is not a substitute for a global portfolio.

Decision rule

Compare total cost and actual exposure; The commercial name and the isolated commission are not enough.

Put it into practice

Compare two ETFs on the same index and decide which one you would choose using replication, total cost, size, spread and dividend policy.