by InteractiveAdvisors
by InteractiveAdvisors
Outlook

Due diligence: 8 factors to consider when selecting an ETF model portfolio

by |Published

By State Street Global Advisors

  • With the growing number of model portfolios available, model selection has become a more complex task.
  • A comprehensive due diligence framework may serve as a guide when selecting a model portfolio and distinguishing one provider from another.

ETF model portfolios each have unique characteristics and finding the right strategy can be a challenging task. When using models, remember that you are not just buying a portfolio — you are also selecting a provider to partner with over the long term. As a result, you may want to implement some best practices when conducting due diligence on models and their providers.

State Street Global Advisors partnered with Greenwich Associates to conduct a study to better understand what investors are looking for in their model portfolio strategies and providers. From this research, we developed a comprehensive due diligence framework that may help you differentiate between model providers and select the best partner to help you achieve your specific goals.

The eight factors are:

  1. Process
  • Is the investment process clear, understandable, and repeatable?
  • Do the product characteristics meet your specific needs?
  • Does the provider execute as outlined in the process?
  1. Performance
  • Does the performance track record satisfy your expectations?
  • Does the product deliver the desired exposures?
  • Does the provider employ best-in-class performance evaluation standards?
  1. Price
  • How are management fees broken out vis-à-vis the fees related to the underlying securities?
  • What is the full value-for-fee, taking into account value-add services?
  • How are costs minimized with respect to tax efficiency and security turnover?
  1. Resources
  • Does your provider allocate dedicated resources to manager and ETF research?
  • How does the supporting infrastructure (compliance, legal, risk, etc.) factor into the process?
  • Has the provider thoughtfully structured resources to more effectively meet client needs?
  1. Reputation
  • Is the firm regarded as a stable producer of quality products?
  • What is the provider’s background in the ETF space?
  • Is the provider seen as a forward-thinking thought leader?
  1. Talent
  • How experienced is the portfolio management team?
  • What kind of access to key professionals do clients have?
  • Is there clear division of labor and subject area expertise?
  1. Communications
  • Are product messages consistent across touch points?
  • Is reporting timely, effective, and thorough?
  • Does the provider actively engage in client education?
  1. Transparency
  • Does the provider explain the process by which benchmarks are selected?
  • How does the provider approach revenue-sharing agreements with third parties?
  • Are you confident in the accuracy of provided performance and attribution documentation?

This post first appeared on July 5th 2023, State Street Global Advisors’ Blog

PHOTO CREDIT: https://www.shutterstock.com/g/SWKStock

Via SHUTTERSTOCK

Source: State Street Global Advisors in partnership with Greenwich Associates, ETF Model Portfolios: The Due Diligence Factor, 2018.

Disclosures

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Investing involves risk including the risk of loss of principal.
 

AUTHOR

State Street Global Advisors
State Street Global Advisors
For four decades, State Street Global Advisors has served the world’s governments, institutions and financial advisors. With a rigorous, risk-aware approach built on research, analysis and market-tested experience, we build from a breadth of active and index strategies to create cost-effective solutions. As stewards, we help portfolio companies see that what is fair for people and sustainable for the planet can deliver long-term performance. And, as pioneers in index, ETF, and ESG investing, we are always inventing new ways to invest. As a result, we have become the world’s third largest asset manager with US $2.72 trillion* under our care. While State Street licenses model portfolio data enabling Interactive Advisors to build and periodically rebalance these portfolios, State Street does not have trading discretion, and it is not an adviser or fiduciary to Interactive Advisors clients investing in these portfolios. *AUM reflects approximately $32.9 billion (as of June 30, 2018), with respect to which State Street Global Advisors Funds Distributors, LLC (SSGA FD) serves as marketing agent; SSGA FD and State Street Global Advisors are affiliated.

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