As a top down manager I start by assessing what parts of the market I want overweight or underweight. Then I seek out what I hope will be the best tools to shape the portfolio.
I think my process for analyzing ETFs, or any product for that matter, is quite simple as I think simple is usually better.
It doesn't take much to look under the hood, take a look at what is there and get some idea of how close the components of a given ETF might bring you to what you are trying to get.
For example I wrote a piece about the materials ETFs for Real Money.com. The ETFs are heavy in Chemicals and have no real correlation to the natural resources part of the sector. So if you want diversification within the materials sector an ETF alone won't cut it.
This is not very complicated but I continue be be amazed at the lack of quality insight in more mainstream media.
The latest example is an article from Morningstar rerun on MSN called 5 Big Myths About ETFs. Here are the myths that Morningstar debunks;
- ETFs are getting all the fund flows.
- ETFs must perform better than mutual funds.
- ETFs are always the cheapest option.
- Online brokerage fees have dropped, so it's safe to dollar-cost average into ETFs.
- ETFs' structure always makes them the more tax-efficient choice.
Honestly I can't find any insightful value in it at all. It would be more useful to be tweaked into boilerplate.
I pick on Morningstar a lot because I expect better yet they continually underwhelm. If you subscribe (I do because the portfolio analytical software is very useful) I would ask you to email in and ask for better ETF coverage and not useless articles like this one.