Due Diligence: 8 Factors to Consider When Selecting an ETF Model Portfolio
- With the growing number of model portfolios available, model selection has become a more complex task.
- A comprehensive due diligence framework may serve as a guide when selecting a model portfolio and distinguishing one provider from another.
ETF model portfolios each have unique characteristics and finding the right strategy can be a challenging task. When using models, remember that you are not just buying a portfolio — you are also selecting a provider to partner with over the long term. As a result, you may want to implement some best practices when conducting due diligence on models and their providers.
State Street Global Advisors partnered with Greenwich Associates to conduct a study to better understand what investors are looking for in their model portfolio strategies and providers. From this research, we developed a comprehensive due diligence framework that may help you differentiate between model providers and select the best partner to help you achieve your specific goals.
The eight factors are:
- Is the investment process clear, understandable, and repeatable?
- Do the product characteristics meet your specific needs?
- Does the provider execute as outlined in the process?
- Does the performance track record satisfy your expectations?
- Does the product deliver the desired exposures?
- Does the provider employ best-in-class performance evaluation standards?
- How are management fees broken out vis-à-vis the fees related to the underlying securities?
- What is the full value-for-fee, taking into account value-add services?
- How are costs minimized with respect to tax efficiency and security turnover?
- Does your provider allocate dedicated resources to manager and ETF research?
- How does the supporting infrastructure (compliance, legal, risk, etc.) factor into the process?
- Has the provider thoughtfully structured resources to more effectively meet client needs?
- Is the firm regarded as a stable producer of quality product?
- What is the provider’s background in the ETF space?
- Is the provider seen as a forward-thinking thought leader?
- How experienced is the portfolio management team?
- What kind of access to key professionals do clients have?
- Is there clear division of labor and subject area expertise?
- Are product messages consistent across touch points?
- Is reporting timely, effective, and thorough?
- Does the provider actively engage in client education?
- Does the provider explain the process by which benchmarks are selected?
- How does the provider approach revenue-sharing agreements with third parties?
- Are you confident in the accuracy of provided performance and attribution documentation?
Source: State Street Global Advisors in partnership with Greenwich Associates, ETF Model Portfolios: The Due Diligence Factor, 2018.