Ha, ha. So you want to compare a few funds? Prepare for pain my friend, prepare for pain. You’d think there’d be some great app out there that would enable you to match up the key data in the blink of a pixel. But no…
While the flash boys [1]
To compare Exchanged Traded Funds (ETFs) as well as funds, try Funds Library’s Data Comparison [3]1 [4] and fold in extra data from Morningstar.
I’ll explain how to do so as we go.
[5]
Comparison able
Once you’ve condensed the universe of possible funds into a solar system of probables, feed your choices into Fund Compare or Data Comparison and face-off the following:
Expenses as measured by Total Expense Ratio (TER) [6] or Ongoing Charge Figures (OCF) [7] – Lower is better [8].
Number of holdings – Higher is better. More securities equals more diversity and less chance that you’re taking unrewarded risk.
Average market cap – If you want exposure to small caps [9] then obviously a fund that holds smaller sized companies is better.
Search for your tracker on Morningstar. Click through to its profile and you’ll find average market cap on its Portfolio page.
Fundamentals [10] – To increase exposure to the value factor [11], compare your trackers on the key ratios:
- Price/earnings
- Price/book
- Price/sales
- Price/cash flow
As a rule of thumb, the lower the number, the greater the trackers’ exposure to value.
Each fundamental measure amounts to a different method of identifying value. Investments will vary in their exposure to each fundamental and this accounts for short-term performance differences. But those transient advantages have levelled out over time, so don’t sweat it.
If the fundamentals don’t reveal a clear winner then plump for price/book as your tie-breaker, because it’s the most widely used factor.
To find fundamental data: search for the tracker on Morningstar. Click through to its profile and you’ll find the fundamentals listed on the Portfolio page.
Turnover [12] – Lower is usually better. A low-trading fund racks up fewer dealing expenses.
You can compare turnovers using the Funds Library Data Comparison tool.
Bid-offer spread [13] – Another cost of trading that affects Unit Trust funds and ETFs. Sometimes the spread can be so large that you may be better off with a higher OCF product.
A tracker’s buy/sell prices will be available on its website. Calculating [14] the bid-offer spread is straightforward.
Tracking error [15] – Lower is better as it means the fund’s costs are consuming less of the market’s return.
It’s tricky to make accurate tracking error comparisons across products, but we’ve previously explored two ways to measure tracking error, using Hargreaves Lansdown’s [16] and Bloomberg’s [17] charting tools.
Performance – Sure, higher is better but asset classes [18] rise and fall like empires. Today’s sick man could well be tomorrow’s dominant power.
Look for the annualised return in the Total Returns section of a product’s Morningstar profile and pay no heed to less than five years worth of data.
Sharpe ratio [19] – Higher is better. The Sharpe ratio is a risk-adjusted measure of investing performance. It enables you to compare whether the risk taken is worth the return. A ratio of 1 is good, 2 is very good and 3 is excellent.
The factsheets of life
It’s rare that one tracker trounces another in any comparison. These are the ultimate me-too products, after all.
I normally err on the balance of advantages, but if you only want to bother with one data point then pick the OCF every time.
Index tracking has become an increasingly competitive space, with little opportunity for product providers to open up yawning advantages.
So while it’s sensible to understand the important features [20] of trackers and how to read a factsheet [21], picking the ultimate product is nowhere near as important as sticking to a passive investing [22] strategy and choosing the right asset allocation [23].
Take it steady,
The Accumulator
- You’ll need to register, but it’s free. [↩ [28]]