There are several factors to consider when selecting an ETF. Using a site like ETF.com can help you to
Average Daily Volume - we want high liquidity
Optionable? - Allows us to use covered calls to make more money on our investment
Expense Ratio - Some ETF's are less expensive than others which helps the profitability. Ideal is <0.75, but <$1 is decent
Holdings - What are their holdings? Is this the type of industry exposure you are looking for in your portfolio?
ROI - past months, 1-year, 3-years, 5-years, 10-years, Inception
Splits vs Reverse Splits
Dividends? - most ETFs do not have dividends or are very minimal, but free money is free money
Who created the ETF? What is their track record on ETFs?
There are a number of ETFs that exist from a variety of companies and it can be overwhelming to try and stay on top of them all. Here are a few suggestions on how you can navigate them.
While selecting the larger asset management company might seem like the smart idea, especially since so many people trust them with their money, it does not mean all of their funds provides the best returns.
Take a look at the following areas to help you make the best choice
Performance - Look at the the 5Y, 10Y, and since Inception.
Look for large disparities between the 5Y, 10Y, and Inception. We do not want to see a high 5Y and a lower 10Y and Inception as it implies that only recently have they been performing well. We prefer an even and consistent return over each of those time frames.
YTD is year to date (January 1 - current date). This can start to show a potential trend for the remainder of the year.
1Y is typically based on one year from current (unless listed - often the end of the previous month)
1Y can be deceiving as there can be good or bad years, but a good fund lasts the test of time.
Expense Ratio - This is the percentage that is taken out annually (expense ratio/12 months = amount taken by fund) for running the fund. The lower the better, but sometimes you pay for what you get; look for < 0.20 for your ratio.
Fund Focus - Each fund has an area of focus. Find various areas of focus that you can take advantage of various sectors of the market
Holdings - What stocks are they investing in the portfolio? What percentage? Be careful of having multiple ETFs that all hold the same stocks.
Under 30-day or 200-day Moving Average (Daily Chart)
Since ETFs can be delisted due to profitability issues, it is best to select ETFs that are trending above their 200MA (daily)
For the more conservative approach, some say above the 30MA (daily)
This rule applies to all securities; unless you are playing them short
Shows a Negative Lifetime ROI
Yes, there are ETFs that lose money
These are called Short ETFs or Inverse ETFs
The function of these are to short some other fund to take advantage of bad times or if you believe the fund is bad (eg Cathy Woods ARKK)
While these can be profitable in the short term, holding long term has proven to be detrimental
Short/Inverse ETFs also have a history of reverse splits which consolidates shares vs giving you more
eg. 1 for 10 split - for every 10 share you own, you now have 1
Exception to the Rule on Negative ETFs
In general, when there is a down market like 2020 (Covid) and 2022 (Inflation), switching over to an inverse ETF can be profitable. Look at the inverse relationship of SOXL and SOXS and how one goes up and the other goes down.
One way to potentially play the Inverse ETFs is to pick them up at a daily down trend below the 200MA or find other points of resistance and weakness in the ETF it shorts.
If you are not attempting to hold your ETFs longer than a year to take advantage of long term taxes vs short term, you could sell off your ETF to purchase the inverse ETF and ride the inverse to profits.
You will need to time your entries correctly to take advantage of the move
Many of the inverses are 2x to 3x leveraged offering great premiums on covered calls; When played in the wheel strategy it can yield excellent returns on premiums in a short period of time
Inverse ETFs price almost always falls in the long run.
Generally speaking, leveraged ETFs and inverse plays should be quickly exited
UVXY, also known as the VIX ETF or Volatility ETF
Inverse of SPY and can be played easily when SPY is up trending or down trending
Excellent play during uncertain times and high volatility
SOXS, inverse semiconductors
This would have been a great play during the 2022 semiconductor chip shortage or during the bear market of 2022
Remember, inverse ETFs are great during down trends, but in good times ultimately flirt with zero or reverse splits
When an ETF is not meeting the profitability expectations the institution may consider closing the ETF
Upon formal announcement you need to check the agreement on what you will receive if you are holding shares until the end
Determine if the price now is worth more than the price later (written in formal contract)
When in doubt, sell your position