In this section I have created a reference guide for investing in Exchange Traded Funds (ETFs):
UndervaluedEquity.com's ETF Finder. This ETF finder will help you find the most interesting ETFs from the
energy and mining sectors quickly and easily. In order to find the best ETFs to invest in, I always
compare similar ETFs with each other on four main characteristics.
For those readers who are not familiar with ETFs at all, I recommend you to watch the following short
introduction video about ETFs on Investopedia, which you will find by clicking this link.
4 Main Characteristics to Compare Similar ETFs
1. Daily Trading Volume
The first characteristic where I pay attention to is the daily volume in which the ETF is traded, as you
want to invest in those ETFs with the highest daily volume. The ETFs with the highest daily volume
are normally the ones with the smallest spread (the difference between the bid price and the ask price),
which should be as small as possible - preferable just only 0.01, making it easier (and cheaper) to buy and sell
2. Net Asset Value (NAV)
For the second characteristic I inform myself whether the ETF trades at a discount or at a premium
to its net asset value (NAV). The net asset value of an ETF is calculated by dividing the total value of the
investment held by the ETF - less any liabilities - by the number of ETF shares outstanding. I prefer those
ETFs which trade at a discount to its net asset value, although you should always wonder why this is the case:
apparently, Mr. Market1 thinks the underlying exposure of this ETF will soon decrease in
3. Expense Ratio
The expense ratio informs you what the costs are for managing the
ETF annually. The broker costs (or transaction costs) are excluded from the expense ratio and form an additional
cost item. To inform you what I consider to be a reasonable expense ratio, I refer you to the first note at the
bottom of this page.
4. Type of Mineral Exposure: Physically Backed vs. Futures Based vs. Stock Based
As I mainly invest in mining stocks and in shares from oil and gas companies I believe the fourth characteristic
is the most important of all: the type of mineral exposure of the ETF. When you invest in mineral ETFs it is very
important to know if you are invested in a physically backed mineral ETF, a futures based mineral
ETF, or if you are invested in a stock based mineral ETF.
The physically backed mineral ETF is invested in the mineral itself, so that the price of
this ETF will follow the price of its specific underlying mineral, i.e. copper.
When you invest in a futures based mineral ETF you do not invest in the underlying mineral
itself, but you will be investing in futures and swap contracts to provide exposure to the price of that
specific mineral, i.e. copper. Thus, the price of a futures based ETF will not automatically follow the price
of the underlying mineral.
Futures based mineral ETFs are very common for soft commodities: a mineral that is grown in stead of mined (i.e.
coffee, corn and wheat). It is very risky to invest in a soft commodity through a physically backed mineral ETF as
the commodity can spoil, causing you to loose your total investment.
Investing in a stock based mineral ETF will give you exposure to the price of a specific
mineral too. Instead of investing in futures and swap contracts, you will be investing in companies which are
operating in a specific mineral sector, i.e. copper miners.
To find out which type of mineral exposure I prefer, I recommend you to read the second note at the bottom of
I have subdivided the best ETFs to invest in, in the following chapters:
The Best Precious Metals ETFs (List).On the precious metals ETF
page you will find links to the best gold, silver, palladium and platinum ETFs.
Yahoo Finance's ETF Finder
To find out how I use Yahoo Finance's ETF Finderto find potential new investment ideas I refer you
to the third note at the bottom of this page.
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Note: I consider an expense ratio of around 0.5%
to be reasonable, over 1% to be expensive and below 0.25% to be cheap.
Note: When I choose to invest in an ETF as an
instrument to invest in a specific mineable mineral, I make sure that this ETF is physically backed by that
mineral in which I want to invest in. I do not settle for futures based ETFs as I do not trust the promise from a
third party to be as good as investing in the physical mineral itself - except for futures based soft commodities
ETFs. Next to investing in physically backed ETFs I sometimes also choose to invest in a stock based ETF, although
I normally prefer to do my own stock picking myself.
Note: On Yahoo Finance's ETF Finder you can
select the column Portfolio Price / Book on the Holding tab, which you can sort from
low to high. I focus myself on the stock portfolio's of those ETFs which are invested in companies with the
lowest price to book value. Then, I figure out what the individual positions in this ETFs stock portfolio are by
visiting the ETFs fact sheet on the issuer's website. Finally, I check if these individual companies comply with my
3 revealing ratio's before I will analyse them further for a potential investment in my stock
Cautionary Note: I have read many statements
online in which is claimed that some physical backed ETFs routinely lend out their stocked minerals for
compensation to hedge funds and other financial institutions for short selling. When the issuer of an ETF decides to lent out (a part of) their stocked
minerals, there is always a risk that the minerals will not be returned. Therefore I recommend you to make sure
you do not invest in these types of physically backed ETFs. Whenever you are not 100% certain if the ETF you
want to invest your hard earned money in, interferes in such practices, make sure to contact the issuer by email
and ask them to disclose this information.
Jeroen Snoeks is the founder of UndervaluedEquity.com, a website for
investors passionate about investing in undervalued stocks. ThroughUndervaluedEquity.com, he shares his
experience and knowledge and will soon reveal his personal stock portfolio.