A shortcut to finding the right ETF
A few guiding questions to make sure you’re on the right track.
I sit in an office with manager research analysts. Their whole job is to understand funds and ETFs in minute detail. The must understand their machinations, the people who run them and whether it is a strong investment product. It is a tough job and requires a lot of hard work and analysis.
The truth is that most investors don’t have the time, the capacity, or the access to professional investors to conduct this type of analysis.
I recently wrote a piece on the questions that I get asked most by people in a social setting - once they know what I do for a living. One of the questions revolves purely around what investment product is ‘the best’.
The correct answer is always ‘it depends.’ I’m not being flippant or evasive with this answer. Thoughtful investors know that I answer in this way because it does depend on what you are trying to achieve. However, if I’m pushed into a corner, this is the way I’d frame the factors that determine if you’re choosing the right ETF.
Being disciplined matters more than being clever
I wouldn’t point you towards investing the majority of your funds in a niche Healthcare ETF because I believe in the success of this particular theme. Broad, low-cost ETFs invest across companies, sectors and countries and can do the heavy lifting for investors just looking to find something to invest in over the long-term. Making consistent additional investments and reinvesting dividends or distributions will supercharge compounding. Holding for the long-term will be tax efficient and lower transaction costs. Discipline matters more than a clever pick. This is at the core of my investment strategy.
Be wary of fees
Fees compound like returns - just in the opposite direction. It can really put a damper on your final return outcome. I shudder at the thought of when I paid over 2% p.a. for a global equity managed fund. No matter how good I think the investment team is, that is a high hurdle to clear, and it’s much more likely that a fund with lower fees – passive or active – will succeed over the long-term.
Simplicity does not make you a bad investor
A portfolio you understand and stick with is more likely to outperform a complex and technical one that you may abandon at the first sign of trouble. Understand what you’re invested in and why – and how it’s connected to what you are trying to achieve in your portfolio. It’s difficult to run through how to set up a financial plan and construct a portfolio when having these conversations in social settings, but this is a good foundation to get started with. You just need good quality equity building blocks in your portfolio when it comes to ETFs. Don’t overcomplicate it.
Similarly, you don’t need your portfolio to look like the wagon wheel that you see in the pre-mixed options in superannuation. You don’t need to hold 15 different asset classes. You don’t need a complex, long-short portfolio with private credit exposure and a cellar full of wine you’re storing as an alternative asset.
Drink the wine. Focus on building a portfolio you have conviction in where you understand how each security is connected to the financial goal you are trying to achieve.
Understand where active and passive management deserve a place
One of the main decisions that you make when choosing ETFs is whether you go for an active or passive investment.
As a quick refresher, active strategies have a professional selecting securities that go into the portfolio. Passive strategies follow indexes and are aimed at matching market returns.
As an investor, you do not need to align yourself with one church. There are places for both in investors’ portfolios.
Morningstar conducts the Active Passive Barometer report, a study that looks at where each strategy succeeds. The latest report studied more than 800 open-ended funds across nine major categories, comparing active performance against passive counterparts over three-, five- and ten-year periods ending June 30, 2025.
The study confirmed that there has been passive outperformance in most categories, which has been a trend across the reports in prior years. Passive funds tend to succeed in well-researched and transparent markets, such as large cap US and Australian equity markets. Where active funds tend to succeed are broad markets with room for market inefficiency, including small/mid cap markets and global bond markets. Active managers should also be used for achieving particular portfolio goals. For example, an investor focused on capital preservation may look for an active real return fund.
Importantly, a large determinant of investment success was manager selection.
Top-quartile managers in eight of nine categories delivered positive excess returns over the decade, highlighting the importance of manager selection in determining investor outcomes.
So how do you select a good manager? That’s a longer conversation, which you can find here.
Final thoughts
These questions should not be confused with a comprehensive selection process for an ETF. Instead, they are an audit and validation of a decision to invest into an ETF. The main points are that the investment should be made for the right reasons that are connected to your investment goals.
Invest Your Way
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