With almost 3,000 U.S.-listed exchange-traded products scattered across 140 different sponsors with 158 index providers, how does a financial advisor carefully screen funds to locate the right ones? It’s not easy cutting through the foggy world of ETFs.

As such, it’s important for advisors to have a screening framework that separates the desirable products from the rest. Let’s examine a checklist of questions that advisors should use to begin their ETF selection process. 

Who is the company behind the fund?
While it may seem obvious to ask who the company behind an ETF is, it may not always be a straightforward answer. For example, the IndexIQ lineup of ETFs isn’t necessarily a household name compared to iShares or SPDRs. However, upon further investigation you’ll find IndexIQ is owned by New York Life. Looking beyond a fund’s brand name is an especially important process for ETF families that may be completely new or unfamiliar to you.

Smaller ETF providers might not necessarily be owned or controlled by a well-known financial institution. Is that a bad sign? Not necessarily. Gauge the management team behind a fund company and if they have success and experience in the asset management business. And if they make the cut, owning their funds might be a good idea, especially if the chosen funds solve a particular client problem. 

What does the fund charge?
ETF sponsors have been waging a cutthroat fee war in recent years, and some companies have cut fees so dramatically that it may make sense to switch assets into lower-cost funds, particularly if they’re executing identical strategies versus higher-cost products.

Are there cases when choosing ETF’s with the absolute lowest expense ratio could be a mistake? The quick answer is yes. For example, some ETF providers will use temporary fee waivers as a marketing gimmick to gather more assets. After the fee waivers expire, ETF expense ratios will jump.

Advisors should focus on ETF families that offer fee stability rather than the short-term fluff of fee waivers. Choosing fund providers with a shareholder-friendly reputation of keeping fund expenses low is a winning strategy.

What are the fund’s external trading costs?
External trading costs refer to the amount of money an investor pays to buy and sell the ETF they want. And a fund's bid/ask spread is the best way to measure external trading costs.

Morningstar reports ETF bid/ask spreads in a percentage format, in the same manner as an expense ratio. For example, the iShares Core U.S. Aggregate Bond ETF (AGG) has a current bid/ask spread of 1.39%. This figure, reported as a percentage, should be added to your ETF’s expense ratio. Keep in mind that bid/ask spreads are not a fixed cost and will vary depending on an ETF’s trading volume and general demand for its shares.

What does the fund’s index do, what does it track, and when did it start?
Despite the rise of actively managed funds, the ETF business is still dominated by index-linked products. Questions you need to ask are: How does the index select and weight securities? How often is the index rebalanced? Is the index based upon backtested results?

In the past, indexes were launched as mechanisms for benchmarking the performance of securities. Today, most new indexes are not tracking mechanisms but rather groups of securities attempting to outperform traditional performance yardsticks like the S&P 500 Index or the Bloomberg Barclays U.S. Aggregate Index.

What’s the fund’s tax efficiency?
Measuring a fund’s ability to minimize taxes can be tricky. It’s hard to know in advance if a fund will impose a large future distribution. But what about its past?

The Morningstar Tax Cost ratio is one tool that can help. It measures how much of a fund’s annualized return is reduced by the taxes investors pay on distributions.

For example, the Vanguard Small-Cap ETF (VB) has a current three-year tax-cost ratio of 0.52%. It’s important to pay attention to how much of a drag a fund’s tax-cost ratio is on its performance. For ETFs that are held in tax-friendly retirement accounts like 401(k)s, traditional IRAs, or Roth IRAs, the tax-cost ratio is not meaningful.

While there are many more questions advisors can ask about ETFs, the checklist provided in this article is a good start for properly selecting funds. And if you feel unsatisfied by the answers given to your questions, it’s probably a sign to avoid a certain fund or fund family and to keep looking for a better alternative.

Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of “Habits Of The Investing Greats.”