Investing Insights What You Need to Know Before Choosing a Stock ETF
Sep 12, 2025
Dan Sotiroff, a Senior Manager Research Analyst at Morningstar, sheds light on the intricacies of stock ETFs. He explains how not all new ETFs are worth the investment and the crucial role of risk-adjusted returns. Dan reveals that ETFs with fewer than 100 holdings are risky and distinguishes between active and passive management styles. He also discusses the challenges of thematic ETFs and the common pitfalls investors face regarding timing and fees. Tune in for essential guidance to make informed ETF choices!
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Anchor To A Low-Cost Total Market Fund
- Start with a low-cost total market ETF as your default core holding.
- Only deviate if the extra active risk clearly offers commensurate, explainable return potential.
Which Risks Are Likely Compensated
- Compensated risks come in two basic forms: strategic-beta exposures and active stock selection.
- Speculating on single stocks or market timing usually won't be compensated over the long run.
Quantify Active Risk Versus A Benchmark
- Measure how different a fund is from a benchmark using tracking error, tracking difference, or active share.
- Treat higher divergence as higher active risk you must justify before investing.