- If I want to choose between two ETFs of different issuers following the same index, what are the factors should I consider?
- For example I want to decide between SCHD of Schwab and Vanguard High dividend yield. One thing is the expense ratio. Schwab's is lower. What else should I check?
- Is the demand for this ETF a factor? I am asking this because an ETF is supposed to follow an index, thus, I do not know if the demand for this ETF influences the price of the stock.
1 Answer
The key two things to consider when looking at similar/identical ETFs is the typical (or 'indicative') spread, and the trading volume and size of the ETF.
Just like regular stocks, thinly traded ETF's often have quite large spreads between buy and sell: in the 1.5-2%+ range in some cases. This is a huge drain if you make a lot of transactions and can easily be a much larger concern than a relatively trivial difference in ongoing charges depending on your exact expected trading frequency.
Poor spreads are also generally related to a lack of liquidity, and illiquid assets are usually the first to become heavily disconnected from the underlying in cases where the authorized participants (APs) face issues. In general with stock ETFs that trade very liquid markets this has historically not been much of an issue, as the creation/redemption mechanism on these types of assets is pretty robust: it's consequences on typical spread is much more important for the average retail investor.
On point #3, no, this would create an arbitrage which an authorized participant would quickly take advantage of. Worth reading up about the creation and redemption mechanism (here is a good place to start) to understand the exact way this happens in ETFs as it's very key to how they work.