ETF questions - beginner

[Anonymous]

Is there any kind of ratings scale for ETFs? For example, when looking at mutual funds, I tend to start with a search of 5 star rated funds from Morningstar and then see which of those is sold by Vanguard. Is there something similar for ETFs? Also can someone explain the important expense ratios for ETFs? I know they are supposed to be cheaper than mutual funds but do you look for expenses below a certain % or worry about tax issues with ETFs? I am well versed in stocks and funds but lost when I start reading about ETFs.

[Anonymous]

Morningstar has ratings for ETFs too.

ETFs are generally cheaper but Vanguard funds are pretty cheap too. The expense ratio can be compared between fund and etf. I don't really understand this completely but there is a spread issue that may inflate the cost over the NAV if its a smaller ETF. Look at the bid and ask and some of the ETFs have a big difference where a mutual is one price per day (there have been some cheating with this which really annoys me on mutual funds). ETFs trade like stocks and should be closely aligned with their NAV.

My understand on the tax issue is that with mutual funds you can get hit with capital gains distributions when stocks are sold within the fund. So you may have to pay an unexpected tax on this and sometimes it seems quite random ie you buy the fund in sept and get hit with a big distribution in dec. In a taxable account (not IRA/401K), this can greatly increase your taxes that year and you have no insight that this is going to happen which stinks if you like to plan your taxes. ETFs seem to throw off very little of these distributions as they don't sell stocks very often.

One difference is if buy say $1000 a month then you may have to pay a brokerage fee like a stock but many brokerages waive that for their own funds.

[Anonymous]

Read an ETF prospectus, particularly the risk factors, on one of the big ETF provider sites. I think iShares (www.iShares.com) has one of the easiest to navigate sites.

Not all ETFs are equal. Some have uniquie tax aspects because of the assets they hold. If you deicde you want to buy one, read the prospectus for that particular fund very carefully. There is also something called a Statement of Additional Information the ETF must file that has some additional information about the provider's ETFs (or a group of them) generally and goes more in depth about how they invest.


There are two main types of ETFs, tracking ETFs, which try to track a particular stock or bond index, and actively managed ETFs, which have a particular investment objective or thesis. Make sure you know which one you are looking at and whether it is right for you.

Good luck.