Due Diligence Defined For ETFs
KNOW WHAT YOU OWN
With more than 1,800 ETFs in the U.S. marketplace today, advisors benefit from a great diversity of choice. Follow four key steps to help you evaluate your investment options and make the best possible choice for your portfolio.
CONSIDER THESE KEY COMPONENTS AS YOU EVALUATE ETF OPTIONS
SPONSOR: Consider character and capabilities
- SELECT A SPONSOR YOU VALUE, one with a history of delivering investment management expertise and timely insights.
- DETERMINE IF THE SPONSOR HAS EXPERIENCE BEYOND ETFs, including proven research capabilities.
- ENSURE THAT THE SPONSOR PROVIDES SUPPORT TO ADVISORS, and is committed to helping you educate your clients.
EXPOSURES: Don't overlook the underlying issue
- FIND OUT HOW THE ETF'S UNDERLYING INDEX IS CONSTRUCTED so that you can understand the drivers of its performance.
- ASK THE QUESTIONS: What is the investment objective? How are securities selected? How are weightings assigned? What are the potential sector or stock biases that result?
- BE SURE TO UNDERSTAND the resulting implications of the index construction, and whether or not the process aligns with your investment objectives.
LIQUIDITY: Look beyond trading volume
- CONSIDER THE ETF'S LIQUIDITY to determine if you can trade when needed and do so at a reasonable cost.
- UNDERSTAND THAT ETF TRADING VOLUME IS NOT AN INDICATOR OF LIQUIDITY. Unlike a single stock, an ETF holds a basket of securities, and its liquidity depends upon the liquidity of all its underlying holdings, not just one stock.
- CALL FOR HELP WHEN IN DOUBT. Most ETF providers have Capital Markets desks to help guide you through the trading process.
COSTS: Factor in all the figures
- DON'T CHOOSE AN ETF ON THE BASIS OF COST ALONE. Consider tracking error and how consistently it moves with the index.
- DETERMINE IF THE ETF PERFORMS AS DESIGNED by viewing live track records if available, or by comparing a back test to the live track record history.
- REMEMBER, while many ETFs have very low fees, the expense ratio is just one component of the total cost of ownership.
COVERING ALL YOUR EQUITY BASES
Investing involves risk, including possible loss of principal. Shares are bought and sold at market price, and are not individually redeemed from a fund. Brokerage commissions will reduce returns.