What are the most important metrics for an ETF?
The most important metrics partly depend on the end use. If the objective is simply to track
an index or benchmark, such as the US S&P 500, then the most important metrics are likely
to be tracking error or performance difference versus the index, and the total expense ratio,
which an also be called an ongoing charge ratio and may have other names.
For both passive thematic ETFs tracking more specialist indices, and active ETFs, the
objective is usually to outperform a well-known benchmark, and any outperformance can be
called “alpha”. The important metric would be historical outperformance, though for a brand
new ETF investors might just need to take a view on whether the niche index was more
interesting.
For investors looking to actively trade an ETF, possibly intraday or over multiple days, costs
such as bid/offer spreads, and any deviation from net asset value, could sometimes become
more important than long term performance. This is because the bid offer spread takes a bite
out of returns every time a trade is made.
