Different aspects for picking ETFs! (Part II)

Tracking error and tracking difference: Tracking Error (TE) and Tracking Difference (TD) are the two parameters used to gauge the performance of the ETFs, as they are meant to track closely the performance of their underlying indices. Sometimes, the returns generated by the ETFs deviate from the returns of their respective benchmarks which is called tracking difference. The efficacy of ETFs is also measured through the TE, which is the statistical tool using the standard deviation to measure the deviation between the ETF’s performance and that of its benchmark. ETFs with lower TE and TD are preferred. Expense ratio: ETFs are cost-effective as they levy relatively lower fees compared to the regular and direct plans of the actively managed equity funds and index funds. Pick the ETFs with lower expense ratio within the category. Impact cost: The impact cost is an indirect transaction cost incurred due to higher bid-ask spread. The impact cost in an ETF would be lower if there is higher liquidity in the exchange. ETFs with lower impact cost are preferred.