Choosing an ETF (Exchange Traded Fund) might feel daunting at first, especially with so many available- but breaking it down into a few key questions can make the process much clearer. While we can’t offer personal investment advice at InvestEngine, we can help you understand what to consider when making your own decisions.
What does an ETF invest in?
Each ETF tracks a different index or theme. For example:
- A FTSE 100 ETF tracks the UK’s 100 largest companies.
- A global ETF might invest in hundreds of companies across different countries.
- A sector ETF could focus on areas like healthcare, clean energy, or technology.
You can explore our full range of ETFs, including filters by region, sector, asset class, and more using our Portfolio Lookthrough tool see our range here.
What are the costs?
ETFs have an “ongoing charge” (also known as the “total expense ratio” or TER), which covers the cost of running the fund. This is expressed as a percentage — for example, 0.20% per year.
Lower-cost investments can mean that more of your money remains invested. Most ETFs on our platform are low-cost, especially compared to traditional funds.
How big and liquid is the ETF?
Larger ETFs (those with more money invested in them) tend to be more liquid because they usually have higher trading volumes. This makes them easier to buy and sell. They may also track their index more closely and have lower 'bid-ask spreads
While we place trades once per day at InvestEngine, it still helps to choose well-established ETFs that are widely held and regularly traded, as this can help avoid delays in settling orders.
Does the ETF fit your strategy?
There’s no single “best” ETF - it depends on your overall investment strategy. When looking to choose ETFs to invest in it’s worth thinking about:
- What other investments you already hold
- Whether the ETF helps diversify your portfolio
- If it matches your time horizon and comfort with risk
You don’t need to pick just one, at InvestEngine, you can hold multiple ETFs to build a portfolio that reflects your goals- or choose a Managed Portfolio if you’d like us to do the work for you.
How is an ETF constructed?
When choosing an ETF, it’s important to understand how it’s built because this can affect everything from performance to tax efficiency and risk.
- Dividends. One key area to check is how the ETF handles dividends. Some ETFs are accumulating, which means dividends from the underlying investments are automatically reinvested. Others are distributing, paying dividends out as income.
- Replication method. Another important factor is the ETF’s replication method — in other words, how it tracks its index. Most ETFs use physical replication, meaning they directly hold the underlying assets (like the actual shares in the S&P 500). Others use synthetic replication, relying on derivatives to match index performance. Synthetic ETFs can offer cost or tax advantages, but must manage additional counterparty risk, which requires additional due diligence before investing.
- Currency hedging. Also, consider the ETF’s currency hedging policy. Some ETFs are currency-hedged, which helps protect returns from exchange rate fluctuations — especially useful if the ETF invests in overseas markets and you’re concerned about currency risk. Others are unhedged, which leaves your returns exposed to FX movements, for better or worse.
Still exploring?
Take your time. Use the information on our platform to compare ETFs, and read through their factsheets. Over time, your confidence will grow — and we’re here to support you every step of the way.