In recent years, sustainable investing has been increasing in popularity, growing the exchange-traded funds (ETFs) menu. With this expansion, there is a call among investors to be attentive in their investment choices as each ESG ETF is unique, with the complexity levels growing by the day.
ETFs are not just weighted funds but distinct strategies. Therefore, an investor seeking a successful investment in this sector should, like in other investments, consider the costs and risks associated with this investment.
Read on for ways to identify ethical, sustainable ETFs to add to your portfolio.
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Check the Level of Assets
For an ethical, sustainable ETF to be a viable investment, it should have minimum asset levels. The threshold should be at least ten million dollars. ETFs with assets below this amount is likely to have a low degree of investor interest, impacting the stock, hence poor liquidity.
Check the Trading Activity
Before considering an ethical, sustainable ETF, you should check its daily trade and ensure sufficient volumes. Popular ETFs will have millions of shares trading daily. On the other hand, some ETFs will not trade at all on some days.
Checking the trading activity and volume will indicate liquidity no matter the asset class. An EFT with a higher trading volume will be more liquid, hence its investment bid.
Consider the Ethical, Sustainable ETFs Market Position
As an investor, you should view your ethical, sustainable ETF independently if you are to get accurate results on its impact on your portfolio. Avoid ETFs imitating an original idea as they will not stand out from their competitors to attract investors.
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Consider its Asset Strategy and Class
ETF assessment requires an investor to think like a manager and develop asset qualities such as volatility and expected returns. Establishing this will require an evaluation of its historical behavior backed by academic theories. With this analysis, you can tell how the asset will behave in the future, how it creates value, its volatility, and its returns in the long run.
Regarding the strategy, most investors will be comfortable investing in one with proof of workability over the years across different markets. Still, the strategy you pick should be backed by a theory on why it works. Whatever your pick on strategy and class, diversification through investing in an ETF with a widely followed index will be safer.
Check the Tracking Error
Tracking ETFs’ underlying indexes is advisable, yet some investors fail at this. Usually, there will be a tradeoff between a low tracking error and diversification. If you are seeking to replace your portfolio, you should consider one with minimal tracking error. Through optimization, you can reduce these errors in the long run.
Add Ethical and Sustainable ETFs To Your Portfolio
Making an ETF investment decision requires a proper analysis like any other investment. As a prudent investor, you should consider the trading volume, asset level, tracking error, strategy, class, and index. This way, you will settle on a liquid asset with great market performance, making it easier to liquidate when you decide to.
