Insights

A ETF Due Diligence Checklist


Evaluate the Index/Fund



Questions to ask, and why is this important


How long has the index existed?


Is the index concentrated in particular sectors, companies or countries?


What is the index weighting methodology (market-capitalization, price-weighted, fundamentally weighted or equal-weighted)?


Does the index report holdings on a daily basis?


How often is the index rebalanced?


Examine the Fund Provider



Questions to ask, and why is this important


How experienced is the ETF provider in developing and managing ETFs?


What are the firm’s total assets under management (AUM) and total ETF AUM?


Does the firm enjoy good relationships with index providers and the advisor community?


How does the firm manage risk?


Does the firm provide valuable trading support and ongoing education?


Examine the ETF’s Product Structure



Questions to ask, and why is this important


How many stocks or bonds are in the index and what are the fund’s diversification guidelines?


What is the investment approach? Does the ETF hold everything in the index?


Does the firm enjoy good relationships with index providers and the advisor community?


What are the fund’s top holdings?


Do the ETF’s holdings make sense in terms of the objectives of the fund?


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


Does the ETF follow a traditional market capitalization weighting scheme or is it equal weighted?


What are the ETF’s assets under management?


What is the regulatory designation of the ETF (unit investment trust, open-end fund, grantor trust, exchange traded note)?


If the ETF lends securities, what is the collateralization process and how is risk managed?


How well does the ETF track its benchmark?


What’s the difference over time between the fund’s return and the index’s return?


Consider the Total Cost



Questions to ask, and why is this important


What is the fund’s total expense ratio?


Are there guidelines to minimize the fund’s rebalancing costs?


What are the trading costs (commissions and transaction costs) associated with buying the ETF shares?


What is the average bid-ask spread?


What is the tracking error of the fund?


Gauge Liquidity



Questions to ask, and why is this important


What is the ETF’s average daily volume?


How does the ETF maintain liquidity?


Has liquidity been impacted due to market volatility?


Does trading activity cause dramatic price swings?

Footnotes