A Comprehensive Guide to ETFs (2nd edition) Module 2: Evaluating ETFs

CFA Institute

Joanne Hill, Elisabeth Kashner

Research

63 Pages

This paper explains how investors can evaluate ETFs using an Efficiency, Tradability, and Fit framework rather than relying on fees alone. It argues that hidden costs, tax mechanics, and liquidity often matter more than advertised expense ratios, with some ETFs lagging benchmarks by over 1.7% annually.

Key Takeaways

Tracking Difference Matters: FEMS returned 8.48% annually versus 10.21% for its benchmark from 2016 to 2025, creating a 1.73% annual performance gap.
Tax Efficiency Varies: DIVS distributed short term gains equal to 1.36% of initial NAV in 2024 and long term gains of 3.46% in 2022.
Investor Goals Differ: The framework uses 3 pillars and 6 investor personas, showing ETF selection depends on objectives, horizon, liquidity needs, and risk tolerance.
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