How to compare ETFs: fees, overlap and what's inside
Two ETFs with different names can hold almost the same things. A guide to comparing funds so you don't pay twice for the same thing.
There are thousands of ETFs and many look alike. Before choosing, it's worth checking a few things. And if you already own several, it's worth seeing whether they overlap: owning five ETFs doesn't mean being five times more diversified.
1. Which index or strategy it follows
This comes first: two ETFs tracking the same index (for example, the S&P 500) hold almost exactly the same, even if a different company issues them. In that case, the difference lies in the fee, the size and the cost of buying them.
2. The annual fee
Between two ETFs on the same index, the cheaper one usually wins over the long term. For a broad stock ETF, a fee under 0.20% is common; thematic or active ones usually charge 0.40% to 0.75% or more.
3. What's inside
- Top 10 holdings: how much of the fund they make up and whether they're very concentrated.
- Sectors: a "growth" ETF can be almost all technology.
- Countries: a "global" ETF usually has more than half in the U.S.
- Number of companies: 30 isn't the same as 3,000.
4. Overlap
Overlap measures how much two funds have in common. If you own an S&P 500 ETF and a Nasdaq-100 ETF, many of the large tech companies are in both, so your real exposure to them is higher than it looks.
5. Size and trading
An ETF with lots of assets and volume usually has a small spread (it costs little to buy and sell). Very small ETFs are more likely to close, and although they return the value of what they hold, it can be an inconvenient hassle.
6. How well it tracks its index
Tracking error measures how far the ETF's return strays from its index's, beyond the fee. For large broad-index ETFs it's usually very small.
7. Where it trades and in what currency
From Mexico you can buy many U.S. ETFs through the SIC, in pesos. There are also ETFs listed on the BMV. The currency of the ETF and of what it holds determine how much the exchange rate affects you.
| Check | A favorable sign | A sign to dig deeper |
|---|---|---|
| Fee | Low for its category | Much higher than similar funds |
| Concentration | Consistent with what you want | A few companies weigh almost everything, unexpectedly |
| Overlap with what you own | Low | High: you pay twice for the same thing |
| Size and volume | Large and heavily traded | Very small or barely traded |
Test what you learned
1. Two ETFs track exactly the same index. What's worth comparing?
- The logo
- The fee, size and spread
- The flashiest name
Show the answer
The fee, size and spread. What's inside is almost identical; the costs differ.
2. What does the overlap between two funds measure?
- How much they have in common
- How much they charge
- How old they are
Show the answer
How much they have in common. A high overlap means they repeat each other.
3. 50% in an ETF where Apple weighs 7%. How much of your portfolio is in Apple through that fund?
- 7%
- 3.5%
- 50%
Show the answer
3.5%. 50% × 7% = 3.5%.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.