Insights into Evaluating ETFs

Abstract

The rapid increase in the number of exchange-traded funds in the marketplace in recent years has made the task of navigating the landscape progressively more onerous. This recent surge in product launches has been fueled by products that offer exposure to more diverse asset classes, including fixed income, international equities and bonds, currencies, commodities, and other alternatively weighted indexes and strategies. The expansion of the product landscape has provided investors with cost-efficient access to asset classes and strategies that have historically been available only to large institutions. These developments have increased the importance of evaluating ETFs, while at the same time elevating the complexity of these analyses. ETFs that appear similar at first glance may be quite different upon closer inspection. In addition, an evaluation of a fund’s underlying index may no longer be sufficient, as the ETF makeup may deviate significantly from the composition of the underlying index as a result of the portfolio optimization process. This article provides advisors with a framework for evaluating an index and the corresponding ETF.