I made a comment to an article this morning on another blog, All Financial Matters, where the idea that an ETF might not be around long if capitalization doesn't reach $200 million. Capitalization is only one of the factors I'd consider when evaluating an ETF. I thought this morning I'd lay out some of my own decision factors for deciding which ETF to purchase.

Trading Volume goes along with the capitalization metric mentioned in the original post. I'm not particularly concerned with capitalization as much as I am with trading volume because I want to see my ETF priced efficiently.

Granted there are trade-offs. Low volume may reflect a buy-and-hold mentality among investors; but if this is the case it should be coupled with decent return and volatility metrics. And yes, trading volume and capitalization tend to go hand-in-hand.

Expenses are always near the top of my list. ETF expenses carry a lot of weight in my decision process. Why? Because every .01% is a friction loss that happens whether my investment makes money for me or not. The closer this number is to zero the better.

I put expenses near the top, but not at the top of the list. Good performance, especially if it comes with lower risk, can easily overcome a small difference in expenses and fees.

Regular readers know I'm always most concerned with Performance and Risk when it comes to evaluating alternative investments. I'm a strong advocate of buying funds with good performance delivered with as little volatility as possible. Nearly all of the ETF screening tools around the web will provide performance and risk information.

I invariably award extra points to funds which have been around long enough to actually have performance metrics listed in these tables. Put another way, I steer clear of funds without a proven track record. If I want to put money into something unproven there's always OTB or the nearby casino.

Lastly, I'll have a look at the Price/Earnings, or PE ratio. This one is never a deal breaker for me, but a high PE is always a warning sign. Having been bitten by the reality of soaring PE ratios in the past, I'm acutely aware of what can happen when a hot sector starts to cool off.

Which brings up another question for another day... What am I doing investing in sector ETFs in the first place?

How long will that ETF be around?

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