Index Tracking Mutual Funds and ETFs Evaluation Checklist

1. Fund Manager/Provider

• Fund manager/Provider: Does the firm have a strong reputation and significant experience in the index fund or ETF marketplace?

A reputable provider often offers operational excellence and a commitment to maintaining low costs and accurate tracking, giving investors confidence in the long-term management of the fund.

2. Investment Objective and Index Alignment

• Target Market/Exposure: Does the fund’s index track the specific asset class (e.g., US large-cap equity, international bonds), sector, or country you want exposure to?

This is the foundational step, ensuring the fund actually buys the assets that are aligned partially or fully with your portfolio goals. A fund tracking the S&P 500 will give you different exposure than one tracking Russell 2000, so matching the fund’s objective to your desired market segment is critical.

• Index Methodology: Understand how the underlying index selects and weights its holdings (e.g., market-capitalization weighted, equal-weighted, fundamentally weighted).

The methodology dictates the risk and return characteristics of the fund. For instance, a market-cap weighted index will have high concentration in the largest companies, while an equal-weighted index will be more diversified but may have higher tracking error. You must ensure the weighting scheme aligns with your investment philosophy. Even indices intended to track similar market segments can vary from one index provider to the next in their risk and return characteristics.

• Diversification and Concentration: How many holdings are in the index? Are the assets concentrated in a few top holdings?

Knowing the level of concentration helps you assess the inherent diversification risk. A highly concentrated fund means its performance is heavily dependent on a few stocks, potentially increasing volatility compared to a widely diversified fund.

• Holdings Overlap: Do the index’s holdings overlap significantly with other investments you already own?

Overlap reduces the benefit of diversification across your entire portfolio, potentially leading to overexposure to a single company or sector. Analyzing overlap ensures you are adding new, unique market exposure rather than duplicating existing positions.

3. Costs and Efficiency

• Expense Ratio (ER): What is the fund’s annual operating fee?

The expense ratio is a drag on returns that compound over time. Since index funds are designed to mimic a benchmark, a lower ER is a direct and guaranteed source of outperformance relative to a higher-cost competitor tracking the exact same index. Lowering this cost directly maximizes your net returns.

• Performance Track Record and Tracking Error: How closely has the fund’s return over the past 1-year, 3-years and 5-years matched the return of its underlying index over time?

Tracking error measures the fund manager’s efficiency in mimicking the index. A large or erratic difference suggests the fund is not fulfilling its primary purpose, possibly due to poor management and index replication (full replication vs. sampling, etc.), high transaction costs, or inefficient handling of cash flows and dividends.

• Trading Costs (for ETFs): Consider any trading commissions and the bid-ask spread.

The bid-ask spread represents an immediate transaction cost incurred when buying or selling the ETF shares; a wider spread means you lose more money on each trade, which is particularly relevant for active traders or those making frequent purchases.

• Turnover ratio: What is the fund’s turnover ratio over the last reporting period?

A fund’s turnover ratio measures how much of the portfolio is bought or sold over a year. Lower turnover, which is common in index funds, reduces trading costs, limits taxable capital gains, and helps maintain low tracking error. Fewer restrictions on eligible securities that may be imposed by a sustainable index fund typically exhibit low-to-moderate turnover and as a result, turnover-related costs remain modest and have only a minor impact on investor returns.

• Transaction Fees (for Mutual Funds): Are there any initial sales loads or transaction fees for buying or selling shares?

These fees, particularly sales loads, can instantly reduce your effective return on the investment; selecting funds with no loads or transaction fees is essential for maximizing capital efficiency, especially when using dollar-cost averaging.

4. Liquidity and Stability

• Assets Under Management (AUM): Does the fund have a high level of AUM?

High AUM suggests the fund is financially stable and has achieved economies of scale, which often translates into lower expense ratios and better operational efficiency. Very small funds can be at risk of liquidation, which can trigger an unexpected taxable event. While exceptions apply, a good rule of thumb is a minimum fund size of $30 million.

• Fund Age: How long has the fund been in operation, and how long has it been pursuing the same sustainable investment approach?

A longer track record, usually up to five years, allows investors to evaluate the fund’s performance through various market cycles and assess the consistency of its tracking error over time. While newer funds can be innovative, older funds provide more historical data for due diligence, subject to any recent rebranding of the fund’s investment approach.

• Average Daily Trading Volume (ETFs): High trading volume is a good indicator of liquidity.

High volume means there are many buyers and sellers, which is critical for ensuring you can execute trades quickly at a fair price without significantly moving the market price of the ETF. It helps keep the bid-ask spread tight.

• Underlying Asset Liquidity: Even if an ETF’s trading volume is low, the liquidity of the underlying stocks or bonds it holds can ensure tight bid-ask spreads.

The liquidity of the portfolio itself is the primary driver of the ETF’s true efficiency. If the fund holds highly liquid, widely traded stocks, its bid-ask spread should remain narrow, even if the ETF itself is not heavily traded.

5. Structure

• Replication Method: Does the fund employ a complete replication strategy or some sampling approach in which a more limited set of securities are purchased and held? In the case of ETFs, does the ETF use physical replication (holding the actual securities) or synthetic replication (using derivatives)?

Where possible, full replication of the underlying index is preferred but cost and liquidity considerations may argue for a sampling approach. Physical replication is generally preferred as it is simpler and carries lower counterparty risk (the risk that the other party in a derivatives contract fails to deliver). Understanding the method helps you assess the fund’s risk profile and transparency.

• Securities Lending: Does the fund lend out its securities to earn income?

Securities lending can help offset the expense ratio and improve tracking difference, but it introduces a small amount of counterparty risk. Investors should review the fund’s policy to ensure lending is collateralized and the risk is prudently managed.

• Tax Efficiency: For non-retirement accounts, note that ETFs generally tend to be more tax-efficient than mutual funds because of how they handle capital gains distributions.

In a taxable brokerage account, tax efficiency impacts your net, after-tax returns; ETFs’ unique creation/redemption mechanism typically allows them to avoid distributing capital gains, which is a major advantage over traditional mutual funds.

• Fund Domicile (International): For global investments, consider the fund’s domicile, as it can affect local tax implications for dividends and investor paperwork.

The fund’s location (domicile) determines how withholding taxes on dividends are applied; for example, a US-domiciled ETF holding European stocks may have a different tax treaty advantage than a European-domiciled ETF, impacting the realized yield.

For Sustainable Investors
6. Sustainability Alignment and Methodology

• Sustainable Investing Approach and Methodology: Which of the following sustainable investing approaches are integrated into the index methodology adopted by the fund? Values-based investing, ESG screening or exclusionary strategies, thematic investing, impact investing, ESG integration and shareholder advocacy, as well as issuer engagement and proxy voting. The enumerated strategies are not mutually exclusive.
• Implementation of the Particular Investment Approach: In what specific ways are the sustainable investing approaches implemented in the index construction and methodology?

Differences exist in the implementation of the above-mentioned approaches. For instance, an ESG screening or exclusionary approach might involve negative screening to exclude companies involved in thermal coal, tobacco, or controversial weapons, while others use positive screening to favor companies with high ESG ratings. Investors should validate the fund’s sustainable approach and methodology and index related rules to confirm that these align with their sustainable investing preferences and personal values.

7. Performance Evaluation

• Funds Tracking Error: How does the fund’s performance over 1-year, 3-years and 5-years compare with the performance of an equivalent conventional index? What is the fund’s tracking error relative to an equivalent conventional index?

In the process of pursuing their financial goals and objectives as well as sustainability preferences, certain non-financial-oriented goals may require investors to accept tradeoffs that could detract from expected investment outcomes. The outcomes will vary in line with the sustainable strategy that investors may wish to implement. To quantify such tradeoffs, investors will want to evaluate the fund’s tracking error relative to the appropriate conventional benchmark. Tracking error is the measure of how closely a fund’s performance tracks its benchmark index. In addition to evaluating the performance of the fund relative to its benchmark index, sustainable investors should evaluate the fund’s performance relative to the equivalent conventional benchmark. For example, a fund that seeks to replicate the performance of the S&P 500 ESG Index, should also be compared to the conventional S&P 500 Index. This will show investors whether and to what extent their sustainable investing strategy involves any tradeoffs.

8. Stewardship and Engagement

• Proxy Voting Policy: How does the fund manager vote on shareholder resolutions related to sustainability issues (e.g., climate change targets, executive pay)?

This is a way a fund manager can exercise active ownership and stewardship regarding stock holdings. For certain sustainable investing approaches, such as impact investing, a strong policy reflecting that shares they hold are used to advocate for better corporate behavior may be desirable.

• Pass Through Voting: Does the fund offer pass through voting or a voting choice program?
  Traditionally, fund managers cast proxy votes for all shares in a fund according to the firm’s own stewardship policies. Under Voting Choice, investors can instead select from a set of pre-defined voting policies (for example, a management-aligned policy, an ESG-oriented policy, or a governance-focused policy). The manager then casts votes in proportion to investor preferences across the fund’s total holdings.

Pass through voting or voting choice programs aim to (a) Enhance investor participation in corporate governance decisions, (b) increase transparency and accountability in proxy voting and (c) Reflect diverse investor values—especially on environmental, social, and governance (ESG) issues—without requiring each investor to vote on every ballot item.

• Engagement Activity and Transparency: Does the fund manager engage with companies on ESG topics, either to gain information and/or to seek to improve company practices?

Transparency in engagement shows the fund is committed to this approach which could apply to both stock and bond holdings.

9. Reporting and Disclosure

• Reporting and Measurable Outcomes-Oriented Metrics: Does the fund report on specific, measurable sustainability metrics (e.g., carbon intensity per million dollars invested, percentage of women on boards) consistent with their disclosed sustainable investing approach?

While the nature of reporting could vary in line with the sustainable investing strategy employed by the fund, investors should expect some transparency from fund managers on the outcomes, if any, achieved by the sustainable investing strategy employed by the fund, including any positive or negative impacts on performance results. Furthermore, strategies that seek to achieve certain outcomes, such as lower CO2 emissions, or increased female representation on corporate boards, should be accompanied by periodic reporting and metrics that quantify the real-world effect of their capital. These reports help demonstrate that an investor’s capital is generating tangible positive environmental or social outcomes and if not, the reasons for same.

• Sustainability-Related Regulation Compliance: Does the fund comply with key sustainability disclosure regulations (e.g., EU Sustainable Finance Disclosure Regulation – SFDR)?

Regulatory compliance, particularly in major financial jurisdictions, provides a standardized level of transparency regarding sustainability objectives. Funds categorized under stricter articles (like SFDR Article 9) are generally more dedicated to sustainable outcomes than those with only basic disclosure requirements.

Work in Process Draft Dated December 1, 2025