As with selecting stocks, investors must first consider what exposure they want to achieve and how the position will complement their existing holdings. With a rapidly expanding universe of ETFs, there’s a fund to suit virtually any investment whim, from small-cap German stocks to Japanese bonds. Oftentimes, investors must choose from a handful of funds that offer exposure to the same trend or asset class. The trick is determining which of those funds best suits your needs.

Investors must also consider how the fund is constructed. Some ETFs feature concentrated portfolios of less than 50 holdings; others contain hundreds of positions. On top of that, some ETFs use capitalization-weighted indexes, in which the largest companies feature most prominently in the portfolio and drive overall performance. Other offerings construct their portfolios around an equal-weight index, in which the fund’s investable assets are divided equally among the underlying holdings.

We generally recommend diversified ETFs, as that’s one of the security class’ greatest benefits. Investors should usually opt for a fund with an equally weighted portfolio when possible, as capitalization-weighted funds often overweight names that are fully valued, limiting their upside potential relative to similar funds that pursue an equal-weighted strategy.

Whether an ETF fits your needs is a moot point if there isn’t sufficient liquidity to easily trade into or out of a position. As with low-volume stocks, it’s quite easy to buy a thinly traded ETF; selling these shares at a decent price can be a chore, especially on short notice. To avoid these pains, stick with ETFs that have at least 100,000 shares traded on an average day.

Liquidity is also the key determinant of bid-ask spreads, which can act as a trading tax on unwary investors. Shares of an ETF can only change hands when a buyer and a seller agree on a price. The bid-ask spread will show you the highest price a buyer is willing to pay for shares, the lowest price at which a seller is willing to sell and the difference between the two. The wider the spread, the higher the transaction cost if you want to purchase or sell shares immediately.

Exchange-traded funds with high trading volumes generally offer tighter bid-ask spreads. SPDR S&P 500 (NYSE: SPY), one of the oldest and most popular ETFs on the market, is the quintessential example of a heavily traded fund. On an average day, the ETF features a bid-ask spread of as low as five basis points; there’s little price slippage for investors who trade the shares with market orders. On the other hand, extremely illiquid ETFs that trade only a few thousand shares a day can have bid-ask spreads in excess of 1 percent. This increases the likelihood of overpaying for an investment.

Another factor that affects bid-ask spreads is the type of asset an ETF tracks. Funds that track liquid US stocks often offer tighter spreads than those that track foreign stocks. Equity funds generally boast lower spreads than bond funds.

Using limit orders is the easiest way to get the best possible price when purchasing ETF shares.

Cost of ownership is another important consideration when selecting an ETF. Comparing expense ratios is the final step in the screening process. Although ETF expense ratios are often significantly lower than the ones charged by similar mutual funds, some ETFs are less expensive than others.

ETFs that focus on US stocks and bonds tend to carry lower expenses than those that focus on foreign markets. Funds that track highly liquid securities also tend to be less expensive than those that focus on more esoteric fare. In general, investors should avoid funds with an annual expense ratio that exceeds 1 percent.

If you’ve run through all of the other screening criteria and are left with more than one fund in the pool of candidates, always go with the least expensive of the bunch–particularly if you plan on holding the fund for the long term.

Although other experts discuss premiums, discounts and tracking error when analyzing ETF investments, a sound investment thesis and careful consideration of the fund’s structure, liquidity and costs are essential to generating a decent return.

What’s New

On May 19 Russell Investments, the steward of many popular indexes, entered the ETF market with the rollout of six Russell-branded discipline-focused funds.

Russell Low P/E ETF (NYSE: LWPE) identifies US large-cap companies that trade at price-to-earnings (P/E) multiplies that are lower than their historical average or their peer group. The fund selects its investments from the constituent companies of the Russell 1000 index. These names are then screened on one-year forecasted earnings, price-to-cash flow and historical P/E multiples.

Russell Equity Income ETF (NYSE: EQIN) also uses the Russell 1000 as its starting point. This ETF’s portfolio includes companies that have paid a dividend in the past year and are expected to maintain or raise that payout.

Russell Contrarian ETF (NYSE: CNTR) tracks the Russell US Large Cap Contrarian Index, which includes names that have consistently lagged the market and their peers.

Russell Growth at a Reasonable Price ETF (NYSE: GRPC) invests in companies that are moderately priced relative to their valuations. However, this ETF stops short of deep-value bargain hunting.

Russell Consistent Growth ETF (NYSE: CONG) focuses on companies with higher-than average-earnings expectations. These companies must also have a history of consistently delivering strong earnings growth.

Russell Aggressive Growth ETF (NYSE: AGRG) focuses on companies whose near-term earnings are forecast to grow faster than the average rate.

All six of the new Russell funds charge a low 0.37 percent expense ratio and should be useful core holdings for investors who follow a strict investment discipline when building their portfolios.

BlackRock last week released two inflation-linked bond funds under its iconic iShares brand.

IShares International Inflation-Linked Bond Fund (NYSE: ITIP) tracks an index of sovereign inflation protected securities issued in local currencies, including emerging- and developed-market debt. Its largest exposures are to the UK, France and Brazil. The fund holds no US debt.

However, the second BlackRock offering, iShares Global Inflation-Linked Bond Fund (NYSE: GTIP), includes US Treasury Inflation Protected Securities in its portfolio mix.