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

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


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


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