To choose the right ETF, you need to understand the key metrics that determine performance, cost efficiency, and risk.
Most investors only look at the TER — but this is only one small part of the story.
In this article, you’ll learn the most important ETF metrics, what they really mean, and how to use them to make better investment decisions
TER (Total Expense Ratio)
The TER is the annual fee charged by the ETF provider to manage the fund.
Examples:
- Global equity ETF → 0.10–0.25%
- S&P 500 ETF → 0.03–0.10%
- Emerging markets ETF → 0.20–0.50%
- Thematic ETF → ~0.40–0.75%
Important:
A low TER does not guarantee better performance.
It’s only the starting point. The real performance difference comes from…
Tracking Difference (TD)
The most important ETF metric — more important than TER.
Tracking difference =
ETF performance − index performance
Example:
Index return: 8.0%
ETF return: 7.6%
Tracking difference: –0.4%
Why tracking difference matters:
- It reflects real cost, not just stated fees
- It includes hidden costs:
- securities lending revenue
- trading efficiency
- tax treatment
- replication method
- Two ETFs with similar TERs can have very different long-term results
Always compare tracking difference when choosing between ETFs that follow the same index.
Tracking Error (TE)
Tracking error measures how consistent the ETF is at following the index.
High tracking error =
- ETF fluctuates more than the index
- Less predictable
- Often found in small-cap, emerging markets, and thematic ETFs
Low tracking error =
- ETF closely mirrors the index
- More stable
- Preferred for core holdings
Tracking error matters mainly for:
- risk management
- index replication quality
- institutional investors
For most retail investors, tracking difference is more relevant.
Volatility
Volatility measures how much the ETF’s price moves up and down.
High volatility =
- bigger price swings
- higher risk
- common in tech, emerging markets, theme ETFs
Low volatility =
- smoother performance
- often found in bonds or defensive equity ETFs
(Important: Low volatility ETFs are not guaranteed to be safe — they simply fluctuate less.)
Volatility helps you understand the ETF’s risk level, not its quality.
Sharpe Ratio
The Sharpe Ratio measures risk-adjusted returns.
Higher Sharpe Ratio = better return per unit of risk.
How to interpret it:
- Sharpe > 1.0 → very good
- Sharpe 0.5–1.0 → average
- Sharpe < 0.5 → poor
This metric is helpful for comparing ETFs in the same category.
Maximum Drawdown
Maximum drawdown shows the largest peak-to-trough loss in history.
Example:
An ETF fell from $100 to $55 → drawdown = –45%
This tells you:
- how the ETF performed in crises
- what kind of volatility to expect
- your psychological risk tolerance
Useful for long-term investors who want stability.
Bid-Ask Spread
The bid-ask spread is the difference between the price buyers are willing to pay and the price sellers ask for.
Why it matters:
Wide spreads = higher cost
Narrow spreads = more liquidity and lower trading friction
Factors influencing spreads:
- ETF fund size
- trading volume
- liquidity of the underlying assets
Large providers with big ETFs usually have tighter spreads.
Securities Lending Return
Some ETFs lend out their securities to earn extra revenue.
This income can:
- reduce tracking difference
- improve performance
- partially offset the TER
Large providers like BlackRock and Xtrackers often use this to reduce costs for investors.
This is not risky when done with proper collateral — but investors should be aware of it.
ETF Size (AUM – Assets Under Management)
ETF size affects:
- liquidity
- bid-ask spreads
- trading efficiency
- fund stability
General guidelines:
- Core ETFs → ideally over €500 million
- Niche ETFs → at least €100 million
- Avoid very small ETFs (risk of closure)
Distribution Policy (Acc vs. Dist)
ETFs can be:
- Accumulating (Acc) → reinvest dividends
- Distributing (Dist) → pay dividends to investors
Choose based on your goals:
Accumulating
- ideal for long-term wealth building
- tax-efficient in many jurisdictions
Distributing
- ideal for passive income
- retirees or income-focused investors
Summary
ETF metrics help you understand cost, risk, efficiency, and long-term performance.
The most important ones for everyday investors are:
- Tracking Difference → real cost
- TER → stated cost
- Fund size → stability & liquidity
- Bid-ask spread → trading cost
- Volatility & drawdown → risk profile
- Distribution method → income vs. reinvestment
Once you understand these, ETF selection becomes much easier and more confident.
→ Next Article: How to Build an ETF Portfolio — Core Strategies Explained
In the next article, we explore the most popular portfolio-building methods, including the world portfolio, core-satellite strategy, and multi-asset approaches.