ETF v praxi
ETF Under the Microscope: How to Properly Vet a Fund Before Buying
Key takeaways
- Before buying an ETF, always check the index, the fee (TER), size (AUM), replication method, and domicile.
- TER and tracking difference reveal the true cost; lower is better.
- A large fund (high AUM) is more liquid and less likely to be wound up.
- An Irish domicile (ISIN starting "IE") is typically most tax-efficient for investors in Czechia.
- Also decide between an accumulating and a distributing share class based on your goal.
This is a regular column in which we take one fund "under the microscope." Instead of a specific tip, we'll give you something more valuable this time — a universal checklist for vetting any ETF yourself, so you don't have to rely on someone else's recommendation. These six factors are decisive.
1. Which index does the fund track?
The most important question: what exactly are you buying? The whole world, the S&P 500, a single sector? The index determines what you're investing in and how diversified the fund is. A thematic or sector fund is more concentrated (higher risk) than a broad index.
2. The fee (TER)
TER is the fund's annual expense ratio. For broad indices, look for fractions of a percent; a few hundredths more compounds significantly over decades. It's not the only cost, though — also watch the tracking difference (how much the fund's return actually deviates from the index).
3. Fund size (AUM)
How much money the fund manages. Higher AUM typically means better liquidity, a tighter spread, and a lower risk of the fund being wound up (liquidation = forced sale and a tax event). Treat very small funds with caution.
4. Replication method
How the fund copies the index — physically (holding actual shares) or synthetically (via a swap). Physical replication is more straightforward for most people and has no swap counterparty risk; both approaches have their place, but it's good to know what you hold.
5. Domicile
Where the fund is registered. For a Czech investor, Ireland (ISIN starting "IE") is usually most advantageous for the taxation of dividends within the fund — see why Irish domicile matters.
6. Accumulating or distributing?
Does the fund reinvest dividends (Acc), or pay them out (Dist)? For the growth phase, the accumulating option is often more tax-efficient in Czechia. Vetted specific funds are listed in the ETF overview; always confirm current figures on the factsheet and on justETF.
FAQ
What's the first thing to look at in an ETF?
The index the fund tracks — it determines what you're actually investing in and how diversified it is. Then address the fee (TER), fund size (AUM), replication method, domicile, and whether it's accumulating or distributing.
Why does fund size (AUM) matter?
A larger fund is typically more liquid, has a tighter spread, and carries a lower risk of liquidation. Liquidation means a forced sale and a tax event. Treat very small funds with caution, even if their focus is attractive.
Is physical replication better than synthetic?
For most people, physical replication is more straightforward — the fund actually holds shares and has no swap counterparty risk. Synthetic replication has its place and advantages for certain markets, but it's good to know what exactly you hold.
Where do I find up-to-date data on a fund?
On the official factsheet and KID document from the provider, and on independent comparison tools like justETF. There you can verify the index, TER, AUM, replication method, domicile, and tracking difference history. Figures change, so always confirm before buying.