Ever tried to figure out what to order for dinner on a Friday night? Perhaps you can relate to the way in which this seemingly simple task can quickly prove so daunting, you’d think it was an Olympic event. Sushi, Thai, BBQ, Chinese, Tacos… what are we in the mood for? There’s that new place downtown… maybe we should try it? 45 minutes later, you’re ordering from the same old pizza shop yet again.
Choosing an ETF to invest in can be even harder. Swap that list of local restaurants for the 4,740 available ETFs in the U.S.1, each serving up its own recipe of stocks, factors, sizes, and regions — and it’s easy to become overwhelmed and frustrated with ‘analysis paralysis.’
With so many ETFs to choose from— and new ones launching seemingly every day—there’s a lot to sift through. Should you treat it like takeout and let your gut be your guide? Different ETFs can be suited to different tastes… and not all of it is obvious at first blush. Let’s look at what to consider when finding the right Exchange-Traded Fund for you.
Before discussing the complex mechanics of fund selection, investors need to define what they’re actually buying. An exchange-traded fund (ETF) is essentially a basket of securities —for example, stocks, bonds, or even cryptocurrencies — that investors can buy and sell on a stock exchange.
So in that way it works much like an individual stock. But then you consider that ETFs make it possible to own dozens or even hundreds of companies all at once, and you realize it shares some qualities with a mutual fund. But still, ETFs are very much different from mutual funds. ETFs typically cost less and can bring more general tax benefits than a comparable mutual fund.
When you add it all up, it’s no surprise that ETFs have seen explosive growth. According to Morningstar®, more than 1100 new ETFs were launched last year and 370 more have been added thus far in 2026.2 That’s a lot of ETFs, and it doesn’t even scratch the surface of the trillions of dollars pouring into these new and existing funds.
When evaluating an ETF, most people will jump to recent returns. After all, who would buy an investment with a poor track record? But that line of thinking can be flawed.
Seeing that a fund appreciated by 30% last year tells us only what’s happened recently. It says very little about the investment strategy or the fund’s potential. As we love to say in finance, past performance is no guarantee of future results.
Rather than oversimplifying performance, it’s important to look at how the ETF behaved during different market cycles. Did it tank during the last market correction, or did the price hold stable? It’s also vital to measure performance against a relevant benchmark. From 1957 to May, 2026, the S&P 500 historically returned an average annual return of about 10.51%, so if a broad-market fund is only returning 4% in a bull market, something may not be quite right.3 Always compare an ETF to an index that tracks the same specific sector or asset class to see how the fund is actually performing compared to a benchmark.
Not all ETFs are built the same way. The rules governing what a fund buys, holds, and sells will ultimately dictate the investing experience. First, the investor needs to know whether the ETF is actively or passively managed.
A passive strategy is designed to track a specific index, like the Nasdaq or the S&P 500. The ETF automatically buys the companies in that index, which helps keep costs low. On the other hand, an active strategy is professionally managed with a human portfolio manager at the helm. That portfolio manager depends on proprietary research and their own acumen to buy and sell securities in an attempt to beat the market. That’s why active funds usually cost more. But sometimes you get what you pay for.
At Motley Fool Asset Management, we offer three actively managed ETFs and six passive ETFs, each tailored to different investor goals.
Beyond the active-versus-passive debate, you can consider factor strategies. Factor investing is a middle ground where a fund follows a specific set of rules to target certain characteristics. For example, a fund might use a factor strategy to only buy companies that show strong momentum, or companies that trade at a deep value relative to their earnings. Review the documentation of any ETF under consideration to ensure that its strategy aligns with your investment goals.
Motley Fool Asset Management offers passively-managed factor ETFs geared toward Momentum, Value, Innovative Growth, and Capital Efficiency.
Investors who buy broad ETFs might assume that they’re getting perfect diversification where their money is spread equally across the universe of companies included in the ETF. That’s potentially not the case.
Most major index funds are market-cap weighted. This means that the larger a company gets, the bigger piece of the ETF pie it becomes. When that happens over and over again, like we’ve seen recently with the Mag-7 stocks, this creates concentration risk. And if any of those top-heavy stocks in an ETF suddenly becomes obsolete from industry headwinds, economic shifts, or an alien invasion (hey, it could happen), that company’s rough patch could have a large effect on the ETF's performance.
Let’s look at a more “realistic example.” These days, seven magnificent AI companies make up almost 35% of the S&P 500.4 If those specific companies falter, the "diversified" S&P 500 ETF you thought you held will suddenly look like anything but. So it’s vital to look at an ETF’s top ten holdings and check if the rules enforce weight limits to prevent too few stocks from dominating the portfolio.
Finally, the less glamorous mechanics of an ETF can quietly eat away at wealth if you’re not paying attention. It’s necessary to evaluate turnover, liquidity, and taxes before making an investment decision.
Turnover refers to how frequently the fund buys and sells the underlying stocks. A fund with 100% turnover replaces the entire portfolio over the course of a year. High turnover means higher trading costs, which ultimately drag down overall return.
Liquidity dictates how easy it is to buy or sell shares of the ETF without moving the price. Don’t look just at the total assets under management; look at the daily trading volume and the bid-ask spread. If you buy an obscure, thinly traded ETF, you might end up paying a premium when you buy and taking a discount when you sell simply because there aren’t enough buyers and sellers in the market.
Taxes can be the silent but deadly killer of compounding returns. Because ETFs are inherently tax-efficient structures, they generally can shield investors from capital gains better than traditional mutual funds for periods of over a year. However, funds with extremely high turnover or funds that hold complex instruments like futures contracts can still pass on unexpected tax bills at the end of the year. Read the fine print to understand the tax implications of the specific asset class you are buying.
Choosing the right ETF from a list of nearly 5,000 might seem as Herculean a task as mucking out the Augean stables. But investors who look past flashy marketing and understand the core mechanics, such as strategy, concentration, turnover, and liquidity, can build a portfolio that should behave as it's designed and help investors pursue their long-term financial goals.
Every ETF offered by Motley Fool Asset Management is built on the “Foolish” investment philosophy: a company-first approach that embraces a long-term, buy-and-hold philosophy with the potential for compounding growth over time. To explore all of our ETF products, click here.