Do the index objectives align with the client’s portfolio?
Questions to Ask |
Why This Is Important |
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How long has the index existed? |
Even as new indexes are constructed, the index provider’s tenure in the marketplace can indicate a measure of stability. |
Is the index concentrated in particular sectors, companies, or countries? |
Understanding an index’s focus allows you to pinpoint the exact exposure you need for the client’s portfolio. |
What is the index weighting methodology (market-capitalization, price-weighted, fundamentally-weighted, or equal-weighted)? |
Disparate index weighting methodologies can lead to differences in performance and risk/return characteristics among seemingly similar indexes. |
Does the index report holdings on a daily basis? |
The more frequently the index reports holdings, the greater the transparency, and the easier it is to determine how closely the ETF tracks its index. |
How often is the index rebalanced? |
If the index frequently adds and removes holdings, those decisions can impact funds that tightly track the index by changing market exposure and increasing trading costs, which reduces investors’ returns. |
Does the firm have a solid reputation in the ETF marketplace?
Questions to Ask |
Why This Is Important |
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How experienced is the ETF provider in developing and managing ETFs? |
Large, well-established firms with a long ETF history may have an advantage in this evolving marketplace. |
What are the firm’s total assets under management (AUM) and total ETF AUM? |
Total assets indicate stability while high ETF assets further illustrate a commitment to the ETF marketplace. |
Does the firm enjoy good relationships with index providers and the advisor community? |
Solid industry relationships indicate potential for the ETF provider to both support current funds and continue to develop new products. |
How does the firm manage risk? |
A disciplined investment process, broad market expertise, and a powerful global investment platform can help manage risk in today’s uncertain market. |
Does the firm provide valuable trading support and ongoing education? |
In today’s dynamic ETF marketplace, expert trading support and actionable investment strategies can positively impact your bottom line. |
Does the fund’s structure help mitigate portfolio risks and promote liquidity?
Does the ETF minimize expenses?
Questions to Ask |
Why This Is Important |
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What is the fund’s total expense ratio? |
An ETF’s expense ratio often compares favorably to a mutual fund’s expense ratio.³ If ETFs are similar in product structure, choose the one with the lower cost, while taking into consideration the transaction costs associated with trading the fund. |
Are there guidelines to minimize the fund’s rebalancing costs? |
Frequent rebalancing can increase your costs. |
What are the trading costs (commissions and transaction costs) associated with buying the ETF shares? |
While ETFs’ expense ratios are known to be low, trading ETFs may incur additional costs that are important to quantify and compare. |
What is the average bid-ask spread? |
A narrow bid-ask spread indicates a ready market that may facilitate trading. |
What is the tracking error of the fund? |
Returns can deviate some from the index, but profound differences may imply poor management or excessive trading costs. |
Can you trade when you want to?
Questions to Ask |
Why This Is Important |
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What is the ETF’s average daily volume? |
High trading activity can mean greater liquidity and more efficient trading. |
How does the ETF maintain liquidity? |
Due to their unique creation/redemption process whereby authorized participants (APs) create and provide liquidity when it is needed, ETFs have potential liquidity that may not be evident from assessing trading volume. |
Has liquidity been impacted due to market volatility? |
Due to their unique in-kind creation/redemption process, an ETF’s liquidity actually reflects the liquidity of the underlying securities. Therefore, if the ETF holds thinly traded securities, APs may have trouble sourcing liquidity during times of market stress. Additionally, less liquid ETFs can result in increased trading costs or limited ability to trade in volatile markets. |
Does trading activity cause dramatic price swings? |
Large spreads between the bid and ask price often indicate an illiquid ETF, so you’ll want to study the spreads and market movements over time. |