Comparison shopping is a typical routine done in stores all the time and it usually ends at the price. But every once in a while, you dig a little deeper. You check under the hood of a car or compare ingredients in food. So why dont we do more of it with our investment products? When shopping for funds, take the time to compare the ETF and mutual fund holdings.

Digging is a prerequisite when it comes to investing. The easiest way to compare funds is to use an ETF screener  (you can use a mutual fund screener for index and mutual funds). Just find the fund category youre looking for and break the results down from there. Simple enough.

Dont Stop At Costs

Picking a fund (mutual or ETF) is great but its useless if you dont know whats in it. An argument can be made for considering costs last. Most people will set an asset allocation for their portfolios based on their goals and risk aversion, then choose investments that best fits those needs.

Finding out the ingredients of each fund is the best way to know whether a fund fits your strategy. When you come across two similar funds with similar objectives, invested in the same things, and with similar performance numbers, youre better off with the lower cost fund.

Before you start reaching for the cheapest fund, heres a few areas to look into first.

Misleading Names

Does the name of the fund actually say what its doing? For the most part it should, thanks to SEC naming rules. But many funds still leave some wiggle room. Make sure to check the funds objectives. You might find this typical disclaimer:

It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index.

So its an index fund at least 80% of the time. Knowing what is happening with the other 20% is important. Does it follow the index? Is it sitting in cash? Or invested somewhere else? Of course, some funds actually try to invest the full 100%.

Lack of Diversification

When you think of an index fund or ETF, the first thing that comes to mind is a diverse basket of stocks and/or bonds. Generally, its true for most funds, but not always.

The blatantly obvious example is a Gold ETF (GLD) or other commodity based funds that are made up of one asset. Those dont typically fit into the average portfolio.

A more likely example might be a sector ETF. A quick search for decent dividend paying sector funds found this choice between the iShares U.S. Telecom ETF (IYZ) and the Vanguard Telecom ETF (VOX). Both pay a nice dividend but have completely different fund holdings:

Notice the difference? Two stocks, AT&T and Verizon, make up 46% of the Vanguard fund. Thats a lot riding on two stocks for an index fund. Sure, its offset by other funds you own, so would owning AT&T and Verizon stock outright.

Fund Overlap

This is the biggest reason. Fund overlap is the point where two or more funds invest in the same thing. You unknowingly end up with too much money invested in one asset class and get the extra risk to go with it.

A little overlap is inevitable and okay. The problem is when you have multiple funds investing in the same thing. There are portfolio tools that can help avoid this. Morningstar has a free Instant X-Ray tool and its Portfolio X-Ray is the premium tool. Its also available for account holders with TD Ameritrade .

For instance, if you owned a balanced fund (like the Vanguard Balanced Index Fund VBINX) and wanted to add an S&P 500 fund (SPY). It might seem like a good combination at first.

Morningstar Instant X-Ray of VBINX and SPY

The X-Ray will show that your balanced fund already is well represented by large cap stocks. Adding the S&P 500 would add more, making your portfolio very large cap heavy. Instead, you might find a mid or small cap fund to be a better fit.

You dont need to micro manage your account either. Just take the time to look beyond the costs and you could save yourself from bigger problems down the road.