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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