ETF Due Diligence Process: 3 Steps Advisors Should Take

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By Marie Dzanis

Financial advisors should establish a process for analyzing the differences between exchange traded funds and evaluating the potential benefits and risks of each ETF.

An advisor’s objective should be to match the philosophy and structure of a given ETF with client needs. It is important to look at the structure of the ETF, review its underlying index and understand the philosophy of the investment manager. When creating a customized due diligence process, take care to avoid common misconceptions by considering the following:

  • Underlying investments are more important than size
  • A focus on track record length may obscure critical details; and
  • Explicit costs, implicit costs and opportunity costs should be considered when determining the costs of investing in an ETF

ETFs are an integral part of many portfolios, valued by financial advisors and investors alike for their liquidity, transparency and tax efficiency. In recent years, their popularity has soared, fueled by financial advisors who were transforming their businesses to meet investors’ changing needs. As clients asked for assistance with complex wealth management challenges, financial advisors sought potent, flexible investment strategies that would help them solve clients’ problems.

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