Suitability and Fundamental View of Exchange-Traded Funds

Not all exchange-traded funds are right for all investors. Investors should first consider what investment thesis they are trying to fulfill and how it may fit into an overall investment strategy. Some funds may be appropriate as a core holding, while others may be better suited to a specialty role. For example, most investors would find a suitable use for a broad-based large-cap equity fund in their portfolio, but only those investors with a high-conviction idea should be purchasing a sector fund.

Questions to ask

Will a strategic index be used as a core holding, or is your decision valuation based? Is an index over, under or fairly valued? What will drive commodity prices up or down? Does a particular sector have competitive advantages that could help it outperform the broader market? These questions, and many more, should constantly be evaluated when choosing a fund. Broad valuation measures such as price-to-earnings and price-to-book are a good starting place, and complementing that research with analyst-driven results can refine the process even further.