Evaluating ETFs - Fidelity (2024)

Not all ETFs are equally efficient so it’s important to follow a fund’s expense ratio, tracking results, and capital gains history when evaluating an ETF.

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Evaluating ETFs - Fidelity (1)

The homebuilder who constructs sturdy houses that stand for hundreds of years does a better job than one whose homes collapse after a short period.

That’s a clear way to assess how well a homebuilder does their job, but what about ETFs? How do we judge how well an ETF does its job?

In short, by judging its efficiency. An efficient ETF produces maximum results with minimal input.

Expenses

In the case of ETFs, the main input is a fund’s expense ratio—the rate charged by the fund to do its job. Since the job of most ETFs is to track an index, we can assess an ETF’s efficiency by weighing the fee rate the fund charges against how well it “tracks”—or replicates the performance of—its index. ETFs that charge low fees and track their indexes tightly are highly efficient and do their job well.

Tracking difference

One obvious place to start is with fees: the lower the better. But while that’s a good starting place, not all funds with low fees will track their indexes well. As such, it makes sense to focus on a fund’s tracking results. How well did the ETF replicate the performance of its index? When the index increased, did the ETF increase by the same amount?

A favored measure is tracking difference—a statistic that looks at how far an ETF has lagged its benchmark, on average, over a one-year period. Tracking difference incorporates the effects of an entire range of management decisions, from securities lending to optimization decisions. Since the principal task of most ETFs is to track an index, funds that deviate from their index—even for short periods—are less efficient and less well run.

Evaluating ETFs - Fidelity (2)

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Capital gains distributions

Still, it’s not only about performance. Investors also turn to ETFs for tax reasons. By their very structure, ETFs are built to be tax efficient and, as such, should also be evaluated on their tax efficiency.

We consider the rate of capital gains distributions. This can be measured by taking the average capital gains paid out to shareholders over a recent period divided by NAV at the time. Lower values are better here, as they maximize tax efficiency.

You can also consider the general tax treatment of the fund itself: Equity ETFs are inherently more tax efficient for long-term holders than currency funds, for instance.

Risks

Aside from tracking and taxes, the last factor investors should consider is risks. Is the ETF likely to close? If it’s an exchange-traded note (ETN), does it have counterparty risks that make it unownable? Generally speaking, ETFs are well-structured investments, but it always helps to peek behind the curtain.

In sum

Ultimately, a primary reason ETFs have experienced significant growth—and will likely continue to do so—is because they are highly efficient investment vehicles. Still, this does not mean that all ETFs are equally efficient and, as such, investors ought to assess a fund’s expense ratio, tracking results, and capital gains history when evaluating an ETF.

Evaluating ETFs - Fidelity (2024)

FAQs

How do you evaluate the value of an ETF? ›

This value is taken from the most recent closing prices of the holdings of the ETF (on a weighted basis) plus any cash that it holds. Then, deduct any liabilities that the ETF may have on its balance sheet and divide that amount by the number of ETF shares outstanding.

How to evaluate performance of ETF? ›

The two ways to see how closely an ETF matches the index performance are 'tracking error' and 'tracking difference'. Tracking difference addresses how closely the ETF tracks the index returns, while tracking error reflects how consistent over time the tracking quality is.

How do I research ETFs on Fidelity? ›

To find Exchange Traded Funds (ETFs) that fit your investment needs, use the ETF Evaluator, which you can find by selecting Research from Fidelity.com. To start finding ETFs, use the ETF Evaluator to search by sponsor, classification, and/or investment category.

Are Fidelity ETFs worth it? ›

ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts. As with all investment choices there are elements to review when making an investment decision.

How do you know if an ETF is undervalued? ›

Evaluate the ETF's Premium or Discount

If the ETF is trading at a premium, it could indicate that the ETF is overvalued. If it's trading at a discount, it could indicate that the ETF is undervalued. Keep in mind that the premium or discount can also be affected by market conditions and investor sentiment.

How do you tell if an ETF is a good investment? ›

The three things you want to look for are:
  1. The fund's liquidity.
  2. Its bid/ask spread.
  3. Its tendency to trade in line with its true net asset value.

What is the best measure of ETF performance? ›

A favored measure is tracking difference—a statistic that looks at how far an ETF has lagged its benchmark, on average, over a one-year period. Tracking difference incorporates the effects of an entire range of management decisions, from securities lending to optimization decisions.

What is the best indicator for ETF? ›

The MACD, a key indicator for trend-following traders, has been instrumental in analyzing the market dynamics of ETFs like SPD. Traders often look for the crossover of the MACD line and signal line to identify potential buy or sell opportunities.

How do you know if an ETF is growth or value? ›

Growth ETFs may have higher long-term returns but come with more risk. Value ETFs are more conservative; they may perform better in volatile markets but can come with less potential for growth.

Does Fidelity have an ETF screener? ›

The Fidelity Stock, Preferred Security, ETF/ETP and Closed End Fund Screeners (Screener(s)) are research tools provided to help self-directed investors evaluate these types of securities.

How does Fidelity ETF work? ›

How ETFs work. An ETF is bought and sold like a company stock during the day when the stock exchanges are open. Just like a stock, an ETF has a ticker symbol and intraday price data can be easily obtained during the course of the trading day.

How to make money with Fidelity? ›

One effective way to earn money on Fidelity is through investing in dividend stocks, which offer regular income payments based on the company's profits. Creating a stream of passive income through real estate investment trusts (REITs) can provide consistent returns.

What is the highest performing Fidelity ETF? ›

The largest Fidelity ETF is the Fidelity Wise Origin Bitcoin Fund FBTC with $10.28B in assets. In the last trailing year, the best-performing Fidelity ETF was FDIG at 57.16%. The most recent ETF launched in the Fidelity space was the Fidelity Yield Enhanced Equity ETF FYEE on 04/11/24.

Is Vanguard or Fidelity better for ETFs? ›

Both Fidelity and Vanguard have a wide variety of low-cost mutual funds and ETFs. If you're simply looking at the options offered by each firm, Fidelity has more options available.

Why is ETF not a good investment? ›

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.

How do you calculate the cost of an ETF? ›

ETFs typically have an expense ratio of 0.05%. An investor can determine the expense ratio by dividing the annual expenses of the investment by the fund's total value, though the expense ratio is also typically found on the fund's website.

Can you calculate the intrinsic value of an ETF? ›

Multiply the intrinsic value of each stock by the percentage of net assets it constitutes in the ETF. Add the results together. This provides an estimate of the ETF's intrinsic value as a whole.

What is fair value for ETFs? ›

Pricing fair value of an ETF​

At the core, most ETFs represent a basket of assets. The price of such an ETF should be equal to the cost of replicating the basket. For example, buying the individual constituents should be equal to the cost of buying the index.

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