Indexology®: Your Core Portfolio

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.

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.