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Antoine Bouvy

Antoine Bouvy

02 May 2025
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How to choose the right ETF?

ETFs (Exchange Traded Funds) have become increasingly popular in recent years among investors seeking simplicity, diversification, and low costs. But the range of options is vast: from broad global ETFs to sector-specific products, from synthetically replicated baskets to physically purchased underlying assets. So how do you make the right choice? In this article, we discuss five crucial criteria to consider when selecting the ETF that best suits your investment goals.

A magnifier looks for ETFs to illustrate the choice of an ETF

Contents:

  1. Underlying index or asset class
  2. Cost structure and Total Expense Ratio (TER)
  3. Physical vs. synthetic replication
  4. Liquidity and tradability
  5. Tax regime and dividend policy
  6. Easyvest’s perspective
  7. Conclusion

1. Underlying Index or Asset Class

What exactly is an ETF?

An ETF or tracker is an investment fund traded on the stock exchange, like a stock. Its goal is typically to track a specific index—like the MSCI World or S&P 500—as closely as possible.

See also "ETF: everything you need to know to invest better"

Choose an ETF that fits your strategy

The underlying asset largely determines the risk profile and expected returns of an ETF. There are ETFs that invest in:

Example

An ETF that tracks the MSCI World Index offers global diversification across more than 1,500 companies in developed markets. The Euro Stoxx 50, on the other hand, is limited to the 50 largest companies in the eurozone. Global diversification typically provides better risk distribution and more stable long-term returns.

2. Cost Structure and Total Expense Ratio (TER)

What is the TER?

The Total Expense Ratio (TER) expresses how much you pay annually in fund management fees, as a percentage of your invested amount. A TER of 0.20% means you pay 2€ annually for every 1.000€ invested.

Why costs matter

Low costs are one of the greatest advantages of ETFs. But even small differences in TER can significantly impact your final return over the long term, due to the effect of compound interest.

Suppose you invest 10.000€ for 30 years at an average annual gross return of 6%. What is the effect of costs?

Difference: 10.698€, solely due to annual fees. This difference is not linear but grows exponentially due to compound interest.

Also watch out for hidden costs

In addition to the TER, there may be extra costs that can further affect your net return: See also: "What are the costs of an ETF? Overview and explanation"

3. Physical vs. Synthetic Replication

What does replication method mean?

ETFs aim to track or replicate an index using two main methods:

What is counterparty risk?

Counterparty risk is the risk that a financial institution with which you enter into a contract — in this case, the party promising to deliver the index return via a swap agreement — may fail to meet its obligations, for example in case of bankruptcy. A swap is essentially an agreement between two parties to exchange returns, making the investor dependent on the financial health of the counterparty.

With synthetic ETFs, the issuer collaborates with a bank or financial institution that offers this swap. If that counterparty defaults, there’s a risk that part of your return or capital may be lost. In practice, this risk is often mitigated through collateral, but it remains an added layer of complexity and uncertainty.

Physical ETFs, on the other hand, do not carry this risk, as they directly purchase and hold the assets. This provides more certainty and direct market exposure — a key advantage for long-term investors.

Physical vs. Synthetic Replication: Pros and Cons

FeaturePhysical ETFSynthetic ETF
TransparencyHigh – investors can see exactly which assets are heldLower – more complex structure and reliance on external counterparties
Counterparty riskNone – direct ownership of assetsPresent – depends on financial health of counterparty
Tax efficiencyEfficient, especially for ETFs domiciled in IrelandIn some cases more favorable via swap structure
Tracking errorStable and reliable for liquid marketsOften slightly lower, especially in illiquid or exotic markets

Physical ETFs are generally more transparent, easier to analyze, and better suited for investors who prioritize stability and control. They track the performance of liquid markets — such as global equities or European government bonds — in a straightforward way, while avoiding the extra risks associated with complex financial contracts. For most long-term strategies, like those implemented at Easyvest, physical ETFs are the natural choice.

Synthetic ETFs can be useful in niche segments or hard-to-access markets, but are typically better suited for experienced investors with specific optimization goals.

4. Liquidity and Tradability

What is liquidity?

Liquidity refers to how easily and quickly an ETF can be bought or sold without significantly affecting the price. A liquid ETF:

Why is liquidity important?

With low liquidity, the bid-ask spread can widen, meaning you pay more when buying and receive less when selling. This is called slippage, and it can quietly erode your return.

ETFs tracking popular indices (like MSCI World or S&P 500) are usually very liquid. Sector ETFs or niche markets are often less so.

5. Tax Regime and Dividend Policy

Accumulating vs. distributing

ETFs can be:

For Belgian investors, accumulating ETFs are more tax-efficient, as they are not subject to the 30% withholding tax on received dividends.

Domicile and tax treaties

Tax treatment also depends on where the ETF is domiciled. Most ETFs in Europe are domiciled in:

Prefer ETFs domiciled in countries with a favorable tax treaty with Belgium, to avoid double taxation.

 
         

6. Easyvest’s Perspective

At Easyvest, we believe that simplicity, transparency, and discipline are the building blocks of a solid investment strategy. That’s why we select ETFs for our clients that:

Our approach is based on academic research and historical data: a passive portfolio of global stocks and European bonds generally outperforms actively managed funds, with less risk and lower costs. Start a simulation on our website to discover your potential return from investing in ETFs.

Want to know which ETFs best match your profile? Our digital simulator helps you design a tailored portfolio. Our advisors are ready to guide you personally.

7. Conclusion

Choosing the right ETF is not a gamble but a well-informed decision based on clear criteria. By paying attention to the underlying asset, costs, replication method, liquidity, and tax considerations, you increase your chances of achieving a sustainable and efficient return.

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Easyvest is a brand of Easyvest NV/SA (No. 0631.809.696), authorized and regulated by the Belgian Authority for Financial Services and Markets (FSMA) as a portfolio management company and as a broker in insurances, with registered office at Avenue Louise 475, 1050 Brussels, Belgium. Easyvest Pension Fund (abbreviated to Easyvest OFP) is a professional pension organisation approved by the FSMA (No. 1011.041.490) and domiciled at the same address. Copyright 2025 EASYVEST NV/SA. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in loss.