how to compare etf performance

Comparing ETF performance involves assessing factors such as return on investment, risk-adjusted return, volatility, expense ratio, and liquidity to identify the most suitable one for your investment objectives.

Oct 10, 2024 at 01:12 am

How to Compare ETF Performance

Exchange-traded funds (ETFs) are popular investment vehicles that offer investors a diversified portfolio of stocks, bonds, or other assets. When comparing the performance of different ETFs, there are several key factors to consider:

1. Return on Investment (ROI)

The ROI measures the percentage change in the value of an ETF over a specified period. This is typically calculated on a daily, weekly, or annual basis. A higher ROI indicates that the ETF has generated a greater return for investors.

2. Risk-Adjusted Return

The risk-adjusted return takes into account the level of risk associated with an ETF. The Sharpe ratio is a common measure of risk-adjusted return that calculates the excess return (return above the risk-free rate) per unit of risk (standard deviation). A higher Sharpe ratio indicates a better risk-adjusted return.

3. Volatility

Volatility measures the variability of an ETF's price over time. A higher volatility indicates that the ETF's price fluctuates more frequently and sharply. Investors may prefer ETFs with lower volatility if they are seeking stability in their investments.

4. Expense Ratio

The expense ratio is a percentage of the ETF's assets that are used to cover operating expenses. A higher expense ratio reduces the potential return on investment.

5. Tracking Error

The tracking error measures the difference between the performance of an ETF and its underlying index or benchmark. A lower tracking error indicates that the ETF is closely following its benchmark.

6. Trading Volume and Liquidity

Trading volume measures the number of ETF shares traded each day. Liquidity refers to the ease with which an ETF can be bought and sold. Higher trading volume and liquidity indicate that the ETF is actively traded and that investors can easily enter or exit positions.

Steps for Comparing ETF Performance:

1. Identify ETFs to Compare: Determine the specific ETFs that you are interested in comparing.
2. Gather Historical Performance Data: Obtain historical performance data for the ETFs, including ROI, risk-adjusted return, volatility, expense ratio, tracking error, and trading volume.
3. Analyze Data: Compare the data points for each ETF to assess their performance. Consider which factors are most important to you based on your investment goals and risk tolerance.
4. Make a Decision: After thoroughly comparing the ETFs, make an informed decision about which one best meets your investment needs.

Remember, ETF performance can fluctuate over time. It is important to monitor your investments regularly and adjust your portfolio as necessary.