How To Compare ETFs: Your Questions Answered!

April 13, 2020

Unfortunately, live webinars never last long enough. I got plenty of great questions during last Thursday's webinar, "Pick This, Not That: How To Compare ETFs," but I couldn't get to them all. That's why I'm answering them here and now. (Questions have been lightly edited for space and clarity.)

If you missed last Thursday's webinar, you can now register and watch the on-demand replay at any time.

So, let’s get to it.


Could you explain what the Max LT/ST Capital Gains Rate means?

This metric, found in the ETF Comparison Tool and in our fund reports, refers to the maximum long-term and short-term tax rates for U.S. investors on a realized capital gain. This can differ from ETF to ETF, depending on the fund's structure.

For most U.S. equity ETFs (and for the moment, most ETFs in the Comparison Tool), you'll see this metric stated as 20%/39.60% (meaning, long-term gains are taxed at 20%, while short-term gains are taxed at 39.60%). But futures-holding commodity pools, for example, instead have a max long-term/short-term capital gains tax rate of 27.84%/27.84%.

Where does dividend yield factor into the selection criteria?

In the webinar, I went over three potential use cases for ETFs: asset allocation, speculation and tax-loss harvesting, discussing how the selection criteria for ETFs for each use case varied due to your goals.

The selection criteria I offered up were broad starter points, though. You absolutely should consider other metrics relevant to your particular circumstances as well, such as dividend yield—especially if you're an investor seeking sources of regular income.

In fact, if dividend yield specifically matters to you, we have a category of high dividend-paying ETFs that we track. I invite you to check them out (and maybe run a few pairs through the ETF Comparison Tool, too).

Is there a difference in the underlying APs per ETF, such that some will stand up more readily to creations/redemptions, levels of capitalization and arbitrage opportunities?

The short answer is yes—but to end investors, most of what you describe can be thought of as behind-the-scenes machinery. The number of APs supporting an ETF does matter, but it's not easily discoverable, so it's not really a data point upon which most investors can feasibly base their ETF comparisons. (The way depth of AP bench shows up for investors is in bid/ask spreads and premiums/discounts to NAV.)

However, if you want to know more specifics about a fund's block liquidity, you should check out our individual ETF fund reports for more information. Under the Tradability tab, on the right-hand column, there's a wealth of information about how easy it is to create/redeem in the fund.

One particular metric you might be interested in is called "Creation Unit/Day," which is the 45-day median share volume divided by the creation unit size—basically, the higher this number, the easier the fund is to trade in bulk or in odd lots.



How can I find a list of similar ETFs to a targeted ETF (example: SPY)?

You've got a few choices.

For starters, at the top of every fund report, there's a list of Competing ETFs. For example, here's the one at the top of the SPDR S&P 500 ETF Trust (SPY):





We also have sector and industry Channel pages, so you can find additional ETFs in a given category. For example, if you're looking for ETFs like SPY, then you might check out our S&P 500 ETF channel or our large cap channel.

You can also find the same data, along with additional comparative information on flows, performance and more, on our ETF Screener.

How is the data in the Factors section determined? How are the values generated, and where does the data come from?

The data for the Factors section of both our Comparison Tool and our Fund Reports comes from MSCI's Factor Classification Standards (FaCS). Both the FaCS and the Factor Box tool attempt to standardize the way factors are measured and evaluated across the investment industry. You can learn more about the methodology used to determine these scores directly from MSCI.

Do you think VOO and SPY would run afoul of the wash sale rule?

We had a few questions come in about the wash sale rule and what it all means, so I'll just answer them all at once.

The wash sale rule is an IRS rule that forbids you from selling a security, then buying a "substantively similar" one within 30 days. It's designed to prevent investors from selling a given security at a loss, then immediately buying it back to harvest the tax benefit; but it can trip people up when they're trading different but similar securities as well.

It's not always easy to figure out which ETFs are so similar that they'd run afoul of the wash sale rules. In fact, this seems a good time to remind everyone that I am not an investment advisor, I can't offer investment advice, and questions like these would be great to ask a qualified financial advisor!

What factors would indicate the possibility of an ETF closing?

Like you, I wish I had a crystal ball on whether a fund would be likely to close or not. Some billion-dollar ETFs get closed, while some funds with $3 million in assets under management (AUM) linger for years and years.

Generally, however, small ETFs (we're talking $10 million in AUM or less) that have been around for a long time (think three years or more) cost issuers more money to run than they generate. These are usually the ones targeted for closure. Other warning signs include low average volume, high expense ratio relative to its segment, and faddish investment themes that have run their course.

In the case of leveraged/inverse ETNs, we've seen dramatic price drops be a trigger for automatic closures as well (read: "Leveraged ETF Closures Piling Up").

Will the Comparison Tool show which ETFs have options?

No, but you can see that information right on the ETFs' fund report pages. Under the Tradability tab, near the bottom of the right-hand column, you'll see a metric, "Open Interest on ETF Options," which tells you the total number of net outstanding contracts for a given ETF:



Are certain sectors more susceptible to ETFs that have exposure outside the ETF's stated purpose?

This is a great question. So legally, an ETF must contain securities that line up with the investment objective stated in its prospectus. If an ETF's prospectus says it's going to track Index XYZ and its managers start randomly adding in securities that aren't in that index, then the managers can get in big trouble. The lawyers can get called in; it gets ugly.

However, among similarly themed investment objectives, there can sometimes be significant difference of exposure from issuer to issuer, and it's not because the issuers are trying to pull a fast one on you. It's just a difference of interpretation. Especially for thematic or active products, two issuers can come at a given investment concept from completely different angles, leading to portfolio holdings that you might not expect.

For example, I recently looked at differences in two travel and transportation ETFs, the US Global Jets ETF (JETS) and the ETFMG Travel Tech ETF (AWAY). Though these two funds ostensibly track the same fairly narrow theme of travel, there is literally no portfolio overlap between them. That's because the two issuers interpreted the theme in two distinct and novel ways.

Generally speaking, thematic, smart beta and active ETFs tend to have the biggest difference in portfolio exposure from fund to fund and issuer to issuer. But even U.S. large cap funds can have surprises inside. That's why it's always important to look under the hood before you buy!

That's all for now. Remember, if you missed last Thursday's webinar, "Pick This, Not That! How To Compare ETFs," you can now register and watch the on-demand replay at any time.

Contact Lara Crigger at [email protected]


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