How Do You Choose The Best ETF?

I applaud all the focus on costs, Paul. As you know, I’m an absolute cost fanatic. But costs aren’t everything. I was wondering how someone like you goes about choosing to invest in an ETF or mutual fund.

Let’s say, for instance, that you wanted to buy gold bullion. Or, alternatively, that you wanted to buy exposure to the emerging markets. How would you personally go about evaluating all the choices for gaining exposure? What factors would you consider; what resources would you turn to; how would trading or other obligations influence things?

Let’s imagine that you’re investing 10,000 euros in each, and walk through the exercise of what funds are available and how you would buy them and what the pros and cons are of each.

We talk a lot about things like costs, counterparty risk and the like, but how do those factor into your decision-making? For instance, I write about the credit risks of exchange-traded notes all the time. But being located in the U.S., where commodity ETNs have (for now) a tremendous advantage in taxable accounts over traditional exchange-traded funds, I personally turn to ETNs for my commodity exposure. That wasn’t the case during the heart of the credit crisis, but now that that has subsided, I feel I can personally manage the counterparty risk by keeping an eye on overall financial conditions and being ready to sell if the market takes another nosedive.

Where do costs come in to the equation for you? Are they as important, more important, or less important than index construction? Do you look at trading costs and loads? Tracking error?

What do you consider and where do you find the data to consider it?

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