How to choose an ETF

We’ve already looked at what exchange-traded funds (ETFs) are and how they can be used within a portfolio. The next step is choosing the ETFs themselves.

With lots of different ETFs available, it can be difficult to know which to choose. But by focusing on a few key considerations, you can narrow down your options and find the right investments that support your goals.

Here are some points to consider when choosing an ETF.

Do you want to invest in shares or bonds?

One of the biggest decisions when choosing an ETF is whether it invests in shares or bonds¹.

Equity ETFs invest in company shares. Shares offer greater potential for long-term growth, but their value can rise and fall more sharply in the short term.

Bond ETFs invest in bonds. Bonds typically experience smaller ups and downs, but their long-term growth potential is usually lower. Some bond ETFs focus on government bonds, while others invest in bonds issued by companies (called corporate bonds). Some invest in a mix of both.

Many investors hold a mix of equity ETFs and bond ETFs, with the balance reflecting their goals, how long they’re investing for and attitude to risk.

Do you want to invest across global markets?

For many investors, a globally diversified ETF can be a good place to start.

Rather than choosing and managing multiple ETFs focused on different countries or regions yourself, a global ETF provides broad exposure through a single investment. Global ETFs can invest in thousands of shares or bonds from around the world, spreading your money across different markets rather than relying on any single area.

It’s worth noting that while two ETFs might both invest globally, they can take different approaches. For example, some global equity ETFs focus on large and medium-sized companies only, while others, known as all-cap ETFs, also include smaller businesses.

As a result, ETFs with similar names may track different indices and provide different levels of diversification. That's why it's important to look at what an ETF actually invests in rather than relying on its name alone.

Do you want to focus on a specific region?

If you prefer building your portfolio yourself, you can use regional ETFs to invest in particular areas such as Europe, Japan or emerging markets.

Regional ETFs can be useful if you want greater exposure to a certain part of the world, although they're generally less diversified than global ETFs.

Some investors use regional ETFs alongside broader global investments, allowing them to increase their exposure to specific markets while maintaining a globally diversified portfolio.

Do you want to invest in larger companies, smaller companies or both?

Equity ETFs can also differ based on the size of the companies they invest in.

Some focus mainly on larger, more established companies. These businesses are often household names and tend to make up the largest share of global stock markets.

Others invest in smaller companies, often referred to as small caps. These businesses can offer greater growth potential, but their share prices may be more volatile.

Some ETFs combine both large and small companies in a single fund, providing exposure to a wider range of businesses through a single investment.

How much does the ETF cost?

Don’t forget to consider costs when choosing an ETF.

ETFs charge an ongoing fee, known as the ongoing charges figure (OCF), which helps cover the costs of running the fund. The OCF is expressed as a percentage of your investment.

While differences in fees may seem small, they can add up over time. For example, an ETF with an OCF of 0.15% would cost £15 a year for every £10,000 invested, whereas an ETF with an OCF of 0.07% would cost £7 a year. Over many years, these differences can have an impact on your overall returns.

At Vanguard, our approach is built around keeping investment costs as low as possible for investors.

Because ETFs are traded on a stock exchange, there can also be costs associated with buying and selling them. With Vanguard, you can trade ETFs through our bulk dealing service for free, or use our Quote & Deal service for a live price for £7.50 per transaction.

The bottom line

Choosing an ETF doesn't have to be complicated. Start by thinking about the role the investment will play in your portfolio and focus on ETFs that align with your goals.

Many investors begin with broad, diversified ETFs before considering more specialised options. By keeping diversification, risk and costs in mind, you can make more informed decisions and stay focused on your long-term investment journey.

¹ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.