Skip to Content
ETF Specialist

How to Assess Strategy ETFs

Be skeptical and scientific when looking at newfangled funds.

Mentioned: , ,

The exchange-traded funds rolling out these days aren't the quintessential index funds of yesteryear but are often active strategies themselves. Many are seductive--who doesn't want more yield or lower volatility? You might have plumped money in one yourself. Or you may have held off buying a newer strategy ETF, and for good reason. They're a bit trickier to understand, charge a lot more, have limited histories, and often have that whiff of faddishness. Experienced hand or not, you'd probably feel more comfortable with a framework for understanding more-complex funds. As a starting point, think of picking a strategy as very much like being an active manager. Indeed, many hedge funds earn their keep by simply rotating among and blending well-known strategies. The market is hard to beat (isn't that why we like ETFs?), so expect assessing strategies to be hard work.

The first question to be asked of any strategy ETF: How does it make money? If you're buying a strategy in the hopes of earning market-beating returns, you better have a very good reason to justify your belief. The ETF providers sure don't. If they did, they'd quit the ETF industry, open up hedge funds, leverage their ideas to the hilt, and mint money. In other words, their comparative advantage is in selling products, not developing cutting-edge investing ideas. So what if the ETF came out with shiny brochures and eye-popping back-tested returns? The very existence of a supposedly market-beating strategy in an ETF should make you wary: The strategy is often 1) repackaged risk; 2) not very well supported with theory or data; or 3) overcrowded. You want a good, intuitive story as to why a strategy will continue to create excess profits, despite everyone knowing about it.

Samuel Lee does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.