💡 What is an ETF in simple terms?
An ETF is a type of investment that groups a basket of assets (such as stocks or bonds). It functions similarly to a stock, as it is bought and sold on a stock exchange.
The challenge of choice: how to find the ideal ETF?
Exchange-Traded Funds (or ETFs) are an essential tool for diversification as they offer investment benefits such as efficiency, generally low costs, and ease of buying and selling.
However, with so many ETFs out there, it’s totally normal if picking one feels a little overwhelming at first. The key is knowing what to look for so that the ETF you choose fulfills the role you need in your portfolio.
In this blog, we explain the 5 fundamental aspects to consider as you evaluate and compare ETFs.
1. Exposure: What role does it play in your portfolio?
Although two ETFs may fall into the same market category, they can target very different parts of the investment universe.
Define the role: To begin, you can ask yourself what goal you need to achieve with this investment: is it a fundamental part of your portfolio? or are you looking for it to fill a specific gap such as a particular sector or industry?.
Review the details: To get a clear idea of what you are buying, review the asset class (stocks, bonds, etc.) and the ETF’s objectives.
2. Active, passive, or mixed management
There are two main ETF management strategies. Understanding their objective can help you choose the correct approach:
| Strategy | How does it work? | Objective |
| Passive ETF | Replicates the composition and performance of a specific market reference, such as the S&P 500. | To match the performance of that market reference. |
| Active ETF | Managed by managers who make decisions about which assets to buy and sell. | To outperform the performance of that market reference. |
Many investors use a combination of both in their portfolio, understanding the pros and cons of each approach, as both strategies can have a place in your investment plan.
3. Composition: What assets does the ETF own?
For most ETFs, their composition is clear. For example, a passive ETF that tracks a major index will likely own the same stocks in the same proportion.
However, for some specialized funds, the composition can be more complex. For example, some commodity-tracking funds may hold a physical stockpile of the asset, while others gain their exposure through derivative instruments. No approach is better than the other, but it is vital to know the underlying assets.
4. Performance vs. Benchmark
An investment’s past performance is never a guarantee of future results. It is easy to misinterpret short-term trends, so it is important not to place too much emphasis on recent performance.
The key: Instead of focusing solely on the overall return, analyze how the ETF performed in relation to its market reference. This gives you confidence that the fund is meeting its objective.
- For a Passive ETF: The ideal is that it performed as closely as possible to its market reference.
- For an Active ETF: Investors look for the fund to have consistently outperformed its market reference over long periods (3, 5, and 10 years).
5. The Issuer
The issuer is the company that offers and manages the ETF.
For the core components of their portfolios, many investors prefer to invest with an established ETF provider that has a strong reputation and a long track record in the market.
Take control! Build your portfolio with Bitso
Now you know how to start evaluating and comparing ETFs to build the perfect strategy for yourself.
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Services offered by the independent investment advisor The Badger Management House Independiente, registered under folio 30205-001-(16900)-22/07/2025. The CNBV exclusively supervises advisory and securities investment services. Consult more details at The Badger Management House
