1. Compare it to other ETFs
2. Compare it to its benchmark
Most passive ETFs track a specific benchmark. However, the ETF might deviate from the index occasionally, especially when demand for an ETF drives its share prices up or down. This is called tracking error and it can put an ETF temporarily out of synch with the index it tracks. You can also use a benchmark that tracks a similar set of investments (for example, the S&P 500 Index) to monitor the performance of active ETFs. Fees and expenses paid by the ETF reduce its returns – the ETF returns will not exactly match the returns of the benchmark.
3. Add up the fees
Fees and commissions reduce your ETFs returns. Learn more about ETF fees.
Fees reduce the return on your investment. The management fees and operating expenses (MER) paid by a fund are reflected in its published rate of return.
4. Disclosure documents
These documents contain information that can help you to assess an ETF. Securities regulators require ETFs to file documents such as:
- ETF summary document
- the prospectus
- periodic portfolio disclosure – for example, the top 25 portfolio holdings on a quarterly basis and full portfolio listing on a semi-annual and annual basis.
- management reports of fund performance
They’re available from
- the ETF provider
- the System for Electronic Document Analysis and Retrieval (SEDAR).
5. Review account statements
Review your account statements to see how your investments are doing and keep track of the costs you’re paying. Then compare the performance of your investment portfolio against your goals and the guidelines set out in your investment policy statement, if you have one.
Don’t chase performance. Just because an ETF did well last year doesn’t mean it will achieve the same return this year. Make sure it fits with your investment goals and your other investments.
6. Consult your advisor
If you have an advisor, ask them to explain why the price of your ETFs have suddenly fallen or risen – and what that means for your portfolio.
7. Follow stock market news
Are we in a bear market? A bull market? Is the market up or down in general? The value of the ETF will be affected by any factors that affect the price of the stocks, bonds or other assets making up that ETF. You can find lots of information at the Toronto Stock Exchange.
8. General economic news
Read the business sections of major newspapers to find out what’s happening in the economy. Are interest rates going up? What’s the inflation rate? How is the Canadian dollar doing against other currencies? Learn more about how economic factors can affect stock prices.
How an ETF has performed in the past can’t tell you how it will perform in the future. But it can give you an idea of how the ETF has performed in different market conditions.