Skip to main content
A scary good deal on trusted journalism
Get full digital access to globeandmail.com
$0.99
per week for 24 weeks SAVE OVER $140
OFFER ENDS OCTOBER 31
A scary good deal on trusted journalism
$0.99
per week
for 24 weeks
SAVE OVER $140
OFFER ENDS OCTOBER 31
// //

Yong Hian Lim/Getty Images/iStockphoto

ETFs turned 25 years old this month, and yet most investors are still getting to know them. To help in this process, I've put together a two-part tutorial on choosing ETFs for your portfolio. Part One is available here; now for Part Two:

1.) Dig for the TER: That's trading expense ratio, a measure of a fund's trading costs for trading securities. Classic ETFs that track major indexes don't do much trading, but some new products are racking up significant costs that should not go unnoticed. Find the TER by looking up an ETF's most recent management report of fund performance. These reports are usually available in the documents section of an ETF's online profile – look for the heading that says Ratios and Supplemental Data.

2.) Understand distributions: Reflecting demand from an aging population, more and more ETFs are paying out investment income every month or quarter. But the composition of these payouts requires some scrutiny. Start at the "distributions" tab that ETF companies offer on their online fund profiles. Next, check the breakdown of the distributions paid out in the past year. Of particular interest for investors in non-registered accounts is the extent to which return of capital is a part of the payouts. Return of capital refers to cash over and above the taxable income generated by the investments in a fund. Each return of capital payment has the effect of lowering the cost that you will use at some point in the future to calculate your capital gain (or loss) when you sell your ETF.

Story continues below advertisement

3.) Check the bid-ask spread: Well-established, popular ETFs trade with a spread of only a cent or two between what sellers are asking and buyers are bidding. Newer or less popular funds may trade at a much bigger spread, which could put you in a position of having to pay more than the most recent market price to get your order filled quickly.

4.) Mind your taxes in non-registered accounts: This ETF tax guide should help you find the funds that fit best with the kind of account you're using.

5.) Know what's most important: A strong ETF portfolio is built on asset allocation, or the appropriate mix of stocks and bonds for your needs; funds with low fees; and, funds that follow proven indexes or investing strategies.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies