How to Choose a Good ETF: TER, Fund Size, Liquidity, and Tracking Error

"ETF on the S&P 500" can have ten different issuers, and there are differences among them that cost you money. This article is a checklist to help you distinguish a quality ETF from an average one — even if you're not an expert.

★ Key: Two ETFs can track the exact same index but differ in fees, size, replication method, and how accurately they track the index. Details determine your long-term return.

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1. TER — Total Expense Ratio

TER (Total Expense Ratio) is the percentage the fund deducts annually. For broad index ETFs, a fair range is 0.03–0.20%. It sounds small, but over the long term, it makes a huge difference due to compound interest.

TER	Cost on 100,000 CZK / year	Over 30 years (approximately)
0.05%	50 CZK	negligible
0.50%	500 CZK	tens of thousands in lost returns
1.80%	1,800 CZK	hundreds of thousands in lost returns

★ Insight: The fee is the only thing in the market you have 100% control over. You can't guarantee returns, but you can choose a low fee — and that stays in your pocket every year, in good times and bad.

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2. Fund Size (AUM)

AUM (Assets Under Management) = how much money the fund manages. A larger fund (in the billions) is usually more stable, more liquid, and less likely to be closed. Very small funds (under ~100 million USD) carry the risk of closure.

3. Liquidity and Spread

Liquidity = how easily you can buy/sell the ETF at a fair price. It's indicated by the spread (the difference between the bid and ask price) — the narrower, the better. Large index ETFs have minimal spreads; exotic funds have wider ones (a hidden cost).

4. Tracking Error and Tracking Difference

A fund should track the index. Tracking difference shows how accurately it does this — how much the ETF's return lags (or leads) the index. A small and stable deviation = quality fund management.

5. Accumulating vs Distributing

• Accumulating (Acc) — dividends are automatically reinvested back. Better for growth and simpler taxes in the Czech Republic.
• Distributing (Dist) — dividends are paid out to your account. Better if you want passive income.

(A detailed comparison is in a separate article in the Academy.)

6. Replication: Physical vs Synthetic

• Physical — the fund actually holds the index's stocks. Transparent, preferred.
• Synthetic — uses swaps with a counterparty. Cheaper for exotic markets but adds counterparty risk.

7. Domicile (for European investors)

For investors from the Czech Republic, ETFs domiciled in Ireland (UCITS) are practical — due to tax efficiency of dividends and European regulation. (Always address tax context according to your situation.)

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Quick Checklist

1. ✅ Low TER (ideally < 0.25% for a broad index)
2. ✅ Sufficient AUM (in the hundreds of millions+)
3. ✅ Narrow spread / good liquidity
4. ✅ Small, stable tracking difference
5. ✅ Acc/Dist according to your goal (growth vs income)
6. ✅ Physical replication (for broad indices)
7. ✅ Suitable domicile (UCITS for EU)

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How QMA Helps

QMA displays key data for ETFs clearly in one place, so you don't have to hunt for information across ten websites. The screener allows you to filter and compare ETFs, instead of opening dozens of issuer tabs.

Summary

You can recognize a good ETF by its low fee, sufficient size, liquidity, accurate index tracking, and the right Acc/Dist variant. By going through the seven-point checklist, you avoid 90% of bad funds — without being an expert.

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Specific ETFs and tickers are mentioned for illustration only, not as a purchase recommendation. QMA is an analytical tool, not a registered investment advisor. Past performance does not guarantee future results. Investing carries the risk of capital loss.*