Evaluating ETFs With a Systematic E-T-F Framework

This article highlights our recent contribution to Module 2: Evaluating ETFs, the CFA Institute’s Comprehensive Guide to ETFs publication (2^nd Edition), which features our FactSet fund classification system and our E-T-F due diligence framework, applied in six case studies.

E-T-F: Efficiency, Tradability, and Fit

The ETF has become so successful—U.S. ETFs set record highs in 2025 for assets under management, inflows, and fund launches—that the process of choosing one has become overwhelming. ETF issuers have competed to fill every market niche and are well on their way to displacing structured products and SMA offerings.

How can a thoughtful investor make an informed, discerning choice among the thousands of ETFs on the market?

Although there is no single answer given the uniqueness of each investor’s objective, timeline, and risk profile, we developed an E-T-F framework to provide structure for decision-making:

Efficiency

The longer you hold an ETF, the more critical it becomes to minimize holding costs and risks. This is because fund costs compound over time, and each penny spent on fees is a penny not earning investment returns. Ongoing costs encompass the fund’s tracking difference or expense ratio along with tax impacts. Risks include potential counterparty default, fund closure, and delayed portfolio disclosure.

Tradability

The other half of the objective portion of ETF due diligence is tradability, an assessment of the cost to buy and sell an ETF. Minimizing trading costs promotes investor success.

Fit

While efficiency and tradability focus on minimizing known costs, fit addresses a different challenge: ensuring an ETF's investment strategy aligns with your objectives. The cost of getting fit wrong can dwarf concerns about expense ratios or trading spreads.

Investor Personas

At the top of the advantages list for ETFs is their broad accessibility. We introduced six investor personas to explore how different types of investors might analyze the choices offered within a range of market segments.

• Mid-career retirement savers

• Registered investment advisors (RIAs)

• Foundations

• Multi-strategy hedge funds

• Next-generation retail investors ("YOLO")

• Global family offices

These investor archetypes each highlight different priorities as the personas adapt the E-T-F framework for their specific objectives, constraints, and due diligence criteria.

For this article, we will discuss the family office persona.

Family Office

Multi-family offices combine features of single-family offices and financial advisors, serving a small group of families with potentially differing needs, interests, and risk profiles. ETFs are well suited for family offices because of their low cost and tax management opportunities. The family office staff must be familiar with all aspects of ETF due diligence, prioritizing Fit, and emphasizing Efficiency over Tradability as most investment time horizons are quite long.

Scenario

A multi-family office called Casa Palo Alto serves three ultra-high net worth pharmaceutical and biotech executives and their families whose wealth is tied up in restricted stock holdings. The families sometimes exercise stock options and borrow against their restricted stock. This cash allows them to diversify their concentrated equity positions and generate supplemental income for living expenses while maintaining their core pharmaceutical holdings.

This borrowing strategy creates a tax planning opportunity: Margin interest expense can offset portfolio income, reducing taxable cash flow, so the family office seeks fixed income investments that generate regular ordinary income distributions. Corporate bonds meet this need by providing predictable income, reasonable yields, and investment-grade credit quality.

Casa’s staff, led by senior analyst Grace, are looking to replace an active corporate US dollar bond manager whose inconsistent performance has not warranted the fees the family office is paying.

Initial Screen

Grace begins by defining her investment criteria. She wants intermediate-term exposure with effective duration between five and eight years, which requires examining each fund's maturity constraints. She'll consider both intermediate-only portfolios and broad-maturity funds that maintain duration in her target range and will exclude 'bullet maturity' ETFs that start with appropriate duration but decline over time.

Credit quality must be investment grade; no high-yield exposure. To ensure adequate liquidity and minimize closure risk, she sets a $1 billion minimum AUM threshold. Finally, fees must stay under 35 basis points, matching the blended rate the family office typically pays for actively managed corporate bond accounts.

At this point, Grace is open to a variety of investment strategies. Determining the right approach will be her first priority. Her screen produces 11 candidates, which is a healthy field but is still too large for detailed analysis.

Winnowing Down

Grace would prefer a smaller set for a detailed deep dive, so she looks for ways to cull the group. She would like to get down to one representative per investment strategy. Grace examines the underlying methodologies to identify meaningful differences.

While nearly all the ETFs use market-value weighting, their security selection processes vary significantly. She finds four distinct rubrics: credit rating, principles-based, multi-factor, market value. Grace gets to work choosing representatives of each rubric. She chooses three complex ETFs and three vanilla ones, aiming to sample each major bond index provider:

• Credit ratings: iShares Aaa-A Rated Corporate Bond ETF (QLTA)

• Multi-factor: iShares Investment Grade Systematic Bond ETF (IGEB)

• Principles-based (ESG): iShares ESG Aware USD Corporate Bond ETF (SUSC).

• Bloomberg Indexes: Vanguard Intermediate-Term Corporate Bond ETF (VCIT)

• ICE Data Indices: iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB).

• S&P Dow Jones Indices: iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

Fit Analysis

Now Grace begins evaluating the merits of each ETF’s investment strategy.

She checks each one’s historical credit and interest rate risk levels to ensure they fit Casa Palo Alto’s parameters. Her analysis period begins at the latest ETF launch date across her candidates: July 2017. Grace ensures the relevance of the results by removing all IGEB’s and IGIB’s histories prior to their respective January 2024 and August 2018 index change dates.

Credit Risk

Corporate bonds involve credit risk. Grace decides to research each candidate ETF’s historical option-adjusted spread (OAS), which measures a bond’s yield vs. a U.S. Treasury security of the same maturity, taking a bond’s call risk into consideration. The lower the OAS, the lower the credit risk/liquidity premium. The following chart shows the OAS history of the semi-finalists.

Option-Adjusted Spread of U.S. Corporate Bond ETF Semi-Finalists

These spread patterns reveal each fund's risk positioning. QLTA's lower spreads reflect its A-AAA mandate—it simply doesn't own the riskier end of investment grade. SUSC's competitive spreads suggest its ESG governance screens may inadvertently select higher-quality issuers. IGEB's elevated spreads indicate some exposure to credit risk. For a family office managing concentrated pharmaceutical positions, lower credit risk may be preferable given they already have company-specific risk in abundance. Grace eliminates IGEB.

Duration

Next Grace checks each ETF’s interest rate risk using the effective duration, which measures a bond’s expected price change given a 1% change in interest rates, expressed in years. The chart below shows the duration history of the semi-finalist ETFs.

Effective Duration of U.S. Corporate Bond ETF Semi-Finalists

In recent months, LQD’s duration exceeded 8.0, Casa Palo Alto’s upper bound. Grace eliminates LQD.

Fit Decision

After filtering credit and duration history, Grace is down to four candidates: QLTA, VCIT, IGIB, and SUSC. To further narrow the field, Grace will compare the funds’ historic yield to maturity vs. the risks taken.

The next chart shows the yields to maturity for the candidate ETFs.

Yield to Maturity of U.S. Corporate Bond ETF Semi-Finalists

IGIB and VCIT share exposure profiles. To choose between them, Grace turns to an operational cost and risk analysis. VCIT and IGIB’s biggest operational difference turns out to be portfolio disclosure frequency: VCIT’s full holdings are published monthly, with a 15-day delay, while IGIB’s are published daily.

IGIB's daily portfolio disclosure allows Grace to monitor exposure in real-time, critical for responding to family inquiries during market volatility. VCIT's monthly disclosure with a 15-day lag would leave the office blind during credit events. For a family office managing concentrated pharmaceutical positions, the ability to track and explain corporate bond exposure daily outweighs any minor cost advantage.

Grace eliminates VCIT. 

The final cut

Grace has narrowed the choice to IGIB, SUSC, and QLTA. Credit wise, IGIB takes the most risk, followed by SUSC. QLTA has the least exposure to corporate default.

For most of the historical returns period QLTA had lower interest rate risk than IGIB and SUSC, but that reversed abruptly in October 2025 when both QLTA and SUSC saw their durations spike.

QLTA’s yield has been consistently lower than IGIB’s and SUSC’s.

Grace would accept QLTA’s lower yield in return for lower risk exposure, but QLTA’s duration spike indicates that its low OAS will not necessarily protect Casa Palo Alto from interest rate risk. Grace eliminates QLTA.

Until that October, IGIB and SUSC’s duration and YTM profiles were nearly identical. SUSC seemed to be offering the better risk-adjusted return, given its lower OAS. But SUSC’s duration spike means that Grace cannot rely on past patterns to persist.

IGIB is an intermediate-only investment grade fund. SUSC holds bonds of any maturity, except for paper with less than one year to maturity. SUSC’s mandate to mirror the risk and return profile of a broad corporate bond index means that its maturity allocation is not constrained. In contrast, a fund that focuses solely on intermediate maturity bonds will have a more predictable duration range.

Grace recommends IGIB: the iShares 5-10 Year Investment Grade Corporate Bond ETF.

She has methodically applied the E-T-F framework to narrow 11 candidates to make her final choice.

• Fit analysis eliminated funds with inappropriate credit risk (IGEB), duration positioning (LQD), consistency (SUSC), and knocked out a less favorable risk/return profile (QLTA).

• Efficiency analysis gave a slight edge to funds with tighter tracking and lower costs. Holdings transparency proved critical enough to eliminate VCIT.

• Grace did not need to look to Tradability as a differentiator.

Read the Full Report

In an increasingly complex ETF landscape, employing a systematic E-T-F framework—focused on Efficiency, Tradability, and Fit—enables investors to navigate choices confidently and align selections with distinct objectives. By leveraging robust due diligence systems and investor personas as outlined in the full CFA Institute module, you can rely on a consistent, repeatable framework to guide decisions.

For the extensive details, access Module 2: Evaluating ETFs from the CFA Institute’s Comprehensive Guide to ETFs publication (2^nd Edition). The CFA Research Foundation page includes a link to Module 1, a comprehensive guide for understanding the features, structure, competitive landscape, use cases, and ongoing evolution of ETFs.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.