E X P O S U R E
Understanding an index’s
benchmark means
determining if a certain ETF
meets a client’s objective.
Investors should know how
recognized and trackable an
index is and whether it is
concentrated in particular
sectors, companies or
countries.
M E T H O D O L O G Y
Knowing the rules that
govern how an index works
is critical to establishing
how it will perform.
Possible methodologies
include market capitalization,
fundamental weighting,
price weighting and
equal weighting.
T R A N S P A R E N C Y
Users need to know how
often an index rebalances,
how long it has existed for
and how frequently holdings
are disclosed.
E L E M E N T S T O C O N S I D E R W H E N P I C K I N G A N E T F :
H O W T O L E A R N A B O U T I N D E X E S :
There is no such a thing as too much information when it comes to due diligence. But fund selectors need to receive good
guidance on what to look out for, especially in a fast-growing area like index-based investing. Here we look at the factors to
consider when choosing an ETF and its underlying index.
in association with
FTSE Russell can help wealth advisors and ETF developers to understand the nature of the indexes we
provide, enabling advisors to efficiently assess funds and make better informed decisions for their clients.
Here are some rules to consider:
D A T A
From index research to
supporting trading and
reporting, FTSE Russell
shares key insights for
better decision making.
A N A LY T I C S T O O L S
A toolbox to inform asset
allocation strategies,
manage risk and examine
market conditions to
help achieve better
risk-adjusted returns.
E X A M P L E
Available data sets exists for categories including
equity, fixed income, corporate actions and dividends,
sustainability and industry classification benchmark.
E X A M P L E
Analytics include ETF data, adaptive asset allocation
policy calculators and PCBond analytics.
I N D E XE T F
L I Q U I D I T Y
The liquidity of an ETF
determines its tradability and
influences the total cost of
ownership. Also, an ETF’s
liquidity reflects the liquidity
of the underlying securities.
E T F S T R U C T U R E
The structure of an ETF will
determine how well it can
mitigate risks and support
liquidity. It is useful to know the
fund’s investment approach,
AUM, top holdings, securities
lending practices and how
closely it tracks its benchmark.
C O S T S
ETF costs are typically lower
than those of comparable
mutual funds. Other than the
expense ratio, costs may
include trading fees.
P R O V I D E R
The reputation of a fund
provider in the ETF market is
essential, as it gives a
competitive advantage over
other firms in terms of AUM.
D E S I G N M E T H O D O L O G Y
Indexes can be designed
to meet certain objectives,
such as diversification.
For an index to be
investable, it is important
that their methodology
closely meets those
objectives.
E X A M P L E
The FTSE Global Equity Index Series offers a consistent
and flexible capping methodology to help investors
meet concentration and diversification requirements.
O B J E C T I V E S
T R A N S P A R E N C Y
Indexes need to be
designed with clear
goals, including how they
will achieve targeted
factor exposures and
how they will follow those
goals in practice.
E X A M P L E
The Russell 2000® Index has the objective to track the
performance of the smallest 2,000 US companies in
the Russell 3000® Index, measured by market cap.
” Transparency is one of our key principles and that’s not only in
the published rules that we use to rebalance the indexes, but also in the governance process any time
there’s a change to the index.”
R O L F A G A T H E R
M A N A G I N G D I R E C T O R , N O R T H A M E R I C A N R E S E A R C H , F T S E R U S S E L L
ETF duediligence:
What to factor in
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