Must-know: Key questions to ask when selecting an ETF


Nov. 20 2020, Updated 2:32 p.m. ET

1.     Provider – How well do you know your provider?
Consider both the ETF provider’s experience in the ETF market, as well as the provider’s size, scale, track record and level of commitment to the ETF industry and to managing exposures versus a rule or an index.  Different ETF providers have different investment philosophies. Importantly, your ETF provider should offer value add services, including a user-friendly web site with tools to help you build your core. For example, iShares utilizes the interactive Core Builder tool to help investors navigate possible ways to achieve this objective.

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2.     Exposure – Can you get the exposure you want?
ETFs, even within a particular asset class or segment of the market, can vary significantly. Pay attention to the index and ask your financial advisor questions about differences between products and its ability to track a core index or benchmark. Understand the exposure you want and ensure the ETF you select is capturing that.

3.     Structure – Are there risk & cost implications from the ETF structure?
Look for ETFs whose product design balances desired exposure with cost and tax efficiency, as well as liquidity. In general, the ETF structure can help minimize the unintended tax consequences.  Generally speaking, ETFs tend to have lower turnover relative to actively managed funds, which can help minimize annual capital gains taxes.

4.     Liquidity – Can you trade when you need to?
Because ETFs trade on exchange, liquidity is a huge factor in why many investors utilize them.  Even for core holdings, which are by definition more long-term in nature, you still want to ensure you have the ability to trade when it’s time to dial up or down your exposure. However, be sure to examine the liquidity of the ETF itself, as well as liquidity of underlying securities.

5.     Costs – What is the total cost of ownership?
Expense ratios are important, however all implicit costs including trading and market impact, should be factored in. Your financial advisor can help you estimate the impact of your trade before it’s placed.

iShares now offers 20 low-cost Core ETFs that are a great starting point to consider as core holdings for your portfolio.  In my next Blog post, I will explore a number of sample core portfolios to demonstrate building an investment strategy for the long haul.

Daniel Gamba, CFA, is Managing Director and head of BlackRock’s iShares Americas Institutional Business. He is also a member of BlackRock’s Global Operating Committee. He is a regular contributor to The Blog and you can read more of his posts here.

 There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Market Realist – Not taking care in choosing an ETF can be as bad as shopping for a car by choosing the first car that can take you to and from work. Different investors have different considerations to take into account, so it’s important for investors to have a clear framework when selecting the right ETF for their specific needs.

Market Realist – Many amateur investors look only at ETF fees. Some people think lower fees are better for returns, while others feel that higher fees mean the manager is better and will result in better returns. The graph above is from a Market Realist article. The graph shows there’s no correlation between the fees and the returns achieved by several emerging market ETFs. To learn more, please read ETF fees should not be the primary factor in choosing ETFs.


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