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ETF Education

A Framework for Selecting Fixed Income ETFs

The rapid expansion of available ETFs has provided investors with more choice. Yet, at the same time, investors may find navigating the investment landscape more challenging This practical framework can help investors select the fixed income ETFs that best meet their needs, whether they’re seeking risk, yield or diversification.

Evaluate Your Investment Objectives

Does the ETF you’re considering align with your investment objectives?

Questions to ask, and why is this important

What is your risk investment objective and tolerance?

What is your investment horizon?

Is your portfolio precise or diversified?

Evaluate the Index

Does the index align with your portfolio?

Questions to ask, and why is this important

How does the ETF replicate the underlying index? Physically, optimisation/sample-based or synthetically?

How long has the index existed?

What is the index weighting methodology (e.g. market-capitalisation)?

Does the index report holdings on a daily basis?

How often is the index rebalanced?

Do the index’s holdings overlap significantly with existing strategies in your portfolio?

What are the index risks?

Examine the ETF Issuer

Does the firm have a solid reputation in the ETF marketplace and the appropriate resources and skills in fixed income investing?

Questions to ask, and why is this important

How experienced is the ETF issuer in developing and managing fixed income ETFs?

What are the issuer’s total assets under management (AUM) in fixed income and total ETF AUM?

How broad is the issuer’s fixed income range?

Does the issuer enjoy good relationships with index providers?

Does the issuer provide valuable trading support?

Does the issuer have a strong local and global presence?

How does the fund provider communicate with investors?

Consider the Total Cost

Does the ETF minimise expenses?

Questions to ask, and why is this important

What is the fund’s total expense ratio?

Does the investment process take into account the impact of rebalancing costs on the performance of the ETF?

What is the average bid-ask spread?

What is the tracking error of the fund?

Gauge Liquidity

Can you trade when you want to?

Questions to ask, and why is this important

What is the best route to trade a fixed income ETF?

How does the ETF maintain liquidity?

Has liquidity been impacted due to market volatility?

Does trading activity cause dramatic price swings?

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