Helping Clients Weigh ETF Investing Strategies

Your client sits across from you, scrolling through their phone. They’ve been “researching” exchange-traded funds (ETFs) online. Again.

“I found this AI robotics fund that’s up 47% this year,” they might say. “Should I dump my boring S&P 500 fund?”

They’re not wrong to be led to these ideas. The ETF landscape exploded from a handful of index funds to over 13,000 products globally. In 2024 alone, 1,988 new ETFs launched, according to ETFGI data. That’s more than five new choices every day.

Your clients see the noise: the FOMO-inducing headlines about crypto ETFs and quantum computing funds. They fail to recognize the systematic evaluation process that distinguishes between wealth-building and wealth-destroying decisions.

The solution isn’t finding the “best” ETF—it’s building a framework that matches the right strategy to each client’s specific situation. When you can systematically evaluate the trade-offs among passive index funds, thematic investments, and active strategies, you transform overwhelming choice into confident decision-making. More importantly, you help clients understand exactly what they’re buying and how it fits their goals.

Understanding the ETF Strategy Spectrum

Your job is to help clients cut through the jargon and understand what they’re actually buying. Let’s break down the six strategies that matter:

1. Passive Index ETFs: Your Portfolio Workhorses

These are the funds that just follow the market. For example, the Vanguard S&P 500 ETF (VOO) tracks the S&P 500, while the Vanguard Total Stock Market Index Fund ETF (VTI) follows the entire U.S. stock market.

The beauty is in the simplicity. Your client gets broad diversification for comparatively little—VOO charges just 0.03% annually. They’re tax-efficient because they rarely sell anything. And you know exactly what you’re getting: market returns.

The trade-off? Your client will never beat the market with these funds.

Translation for your client: “These funds give you the market’s return, nothing more, nothing less—at the lowest possible cost.”

2. Active ETFs: Paying for Expertise

These are funds where actual humans are making decisions. Portfolio managers research companies, time the market, and try to beat the benchmark.

Here’s what you’re evaluating: Can this manager justify their fee? Because your client is paying about 0.64% on average, which is 20 times more than passive funds like VOO. The data isn’t encouraging—SPIVA’s data show that almost two-thirds of actively managed large-cap equity ETFs fail to beat the S&P 500.

But many actively managed funds can be worth the extra fees, especially in emerging markets where fund manager expertise is crucial.

Translation for your client: “You’re paying extra for a fund manager’s expertise—sometimes it works, sometimes it doesn’t.”

3. Thematic ETFs: Betting on the Future

These include robotics, clean energy, cybersecurity, and artificial intelligence. They let clients invest in their beliefs about where the world is heading.

The recent performance of the Technology Select Sector SPDR Fund (XLK) shows the upside when you’re right about a trend. As of mid-2025, its three- and five-year trailing returns, at about 19%, outperformed the S&P 500’s returns of nearly 15% over both periods, according to data from TradingView. However, the fund is really concentrated in a volatile sector. When tech crashed in 2022, funds like XLK didn’t just decline—they got demolished, as can be seen below:

Timing matters more than people think, with clean energy and EV charging both getting hot and then declining significantly over the last half decade. As such, you’re not just helping clients pick a good sector—you’re helping them pick the right time to be invested in it.

Translation for your client: “These let you bet on specific trends—great when you’re right, painful when you’re wrong.”

4. Smart Beta/Factor ETFs: Systematic Tilting

Instead of picking individual stocks, these funds tilt toward traits that have worked well in the past: value stocks (cheap companies), momentum stocks (recent winners), and quality stocks (profitable companies).

For example, the Vanguard Value Index Fund ETF (VTV) focuses on value and attracted $10.76 billion from mid-2024 to mid-2025 as investors bet on a value comeback, according to ETF Database data.

However, factors work in cycles, not all the time. You’re not just buying the factor—you’re timing it.

Translation for your client: “These funds tilt toward stocks with specific characteristics that historically outperform—but timing matters.”

5. Leveraged and Inverse ETFs: Handle with Extreme Care

Leveraged ETFs aren’t investments—they’re trading tools. The daily reset mechanism means they decay over time in bumpy markets. You can lose money even if you’re right about direction. I’ve seen too many clients buy these, thinking they’re just “turbocharged” versions of regular funds.

Regulators have made leveraged ETFs a point of emphasis, examining them closely for suitability issues. Document everything if you recommend these. The compliance headaches aren’t worth it for most clients.

Translation for your client: “These are short-term trading tools, not investments—they can amplify both gains and losses dramatically.”

6. ESG ETFs: Investing with Values

Environmental, social, and governance (ESG) funds exclude companies that fail to meet specific ethical standards. Oil companies, tobacco, weapons makers—different funds draw different lines.

Surprisingly, they often beat traditional funds, but probably not for the reasons clients think. Many ESG funds have a quality bias—they own profitable, well-managed companies. That’s been a winning trait recently.

However, “sustainable” means different things to different fund companies. Some exclude entire industries. Others just buy the “best in class” companies from every sector. Make sure your clients understand what they’re actually buying.

Translation for your client: “These let you invest according to your values—though different funds define ‘responsible’ differently.”

Aligning Strategy with Client Goals

Most evaluation mistakes happen because advisors skip the diagnostic phase. Before discussing any ETF, establish four key factors that determine strategy suitability.

Time Horizon: The Ultimate Decider

Short-Term Clients (Under 5 Years)

These clients need stability over growth. Focus your evaluation on protecting what they have.

Example: Sarah, 62, retiring in three years

• What matters most: Keeping her money safe and a steady income
• Types to consider: Broad market funds with modest stock allocation, quality bonds, and dividend funds
• Types to avoid: Trend-based funds, leveraged products, and emerging markets

Your script: “With your timeline, we’re looking at funds that protect what you’ve built rather than chasing growth.”

Medium-Term Clients (5-15 years)

These clients can strike a balance between growth and safety.

Example: Mike, 45, kids starting college in eight years

• What matters most: Steady growth without big surprises
• Types to consider: Core market funds, developed country funds, and quality-focused funds
• Types to consider carefully: Trend funds as small pieces and active strategies in specific areas

Your script: “We’re looking for funds that grow your money while avoiding strategies that could hurt your college funding timeline.”

Long-Term Clients (15+ Years)

These clients can focus on growth and worry less about the bumps along the way.

Example: Jessica, 28, saving for retirement

• What matters most: Maximum long-term growth
• Types to consider: Total market exposure, emerging markets, growth-focused funds, and trend investments
• Can consider: Active strategies, factor timing, and higher-risk themes

Your script: “With decades ahead, we’re looking at strategies for maximum long-term growth—short-term bumps are just noise.”

Risk Appetite: Matching Tolerance to Strategy

Conservative clients need reliable portfolios.

• Evaluation focus: Low volatility, broad diversification, and predictable outcomes
• Red flags: Concentration in any single theme, leverage, and inverse strategies

Moderate clients can accept volatility for growth.

• Evaluation focus: Balanced risk-return profiles and systematic approaches to higher returns
• Opportunities: Factor tilts, international diversification, and modest thematic exposure

Aggressive clients prioritize returns over comfort.

• Evaluation focus: Growth potential, innovation exposure, and tactical opportunities
• Green lights: Thematic strategies, emerging markets, and active management in growth areas

Income Needs vs. Growth Goals

An income-focused evaluation emphasizes distribution sustainability and tax efficiency.

Example: Robert, 68, needs a 4% portfolio withdrawal

• Evaluation criteria: Dividend yield sustainability, tax efficiency of distributions, total return potential
• Suitable strategies: Dividend-focused ETFs, municipal bonds for high-tax clients, REITs for diversification
• Evaluation questions: “Can this fund maintain distributions during market stress? How tax-efficient are the payments?”

A growth-focused evaluation prioritizes total return over current income.

Example: Lisa, 35, maximizing retirement savings

• Evaluation criteria: Long-term total return potential, tax efficiency, compound growth
• Suitable strategies: Growth-oriented indexes, international exposure, reinvestment-focused funds
• Evaluation questions: “What’s the long-term potential for growth? How tax-efficient is this for compound growth?”

Tax Efficiency: The Hidden Performance Factor

A taxable account evaluation requires a tax-adjusted return analysis.

Key metrics to consider:

• Capital gains distributions
• Tax efficiency ratios
• Foreign tax credit benefits

Example: High-net-worth client in the 37% tax bracket

• Evaluation priority: After-tax returns, municipal bond considerations, and tax-loss harvesting opportunities
• Strategy implications: Prefer ETFs over mutual funds, consider municipal bonds, and evaluate foreign tax credits

A tax-deferred account evaluation focuses on pretax returns.

• Key metrics to consider:
• Total return potential
• Fees Risk-adjusted performance

Strategy Isn’t Everything—Costs and Liquidity Still Matter

The most elegant strategy evaluation means nothing if hidden costs destroy returns. Your evaluation framework must go beyond expense ratios to capture the total cost of ownership.

Expense Ratio Evaluation

Don’t just compare fees—evaluate the justification for each fee. VOO’s 0.03% is justified by massive scale and index tracking. An active ETF’s 0.60% needs performance justification.

Evaluation questions:

1. What are you paying for?
2. Is there evidence this higher fee creates value?
3. What’s the break-even performance needed?

Bid-Ask Spread Analysis

Check trading costs during normal and stressed conditions.

Evaluation process:

1. Check the spreads at market open, midday, and close.
2. Look at the spread history during volatile periods.
3. Factor trading frequency into total cost calculations.

Liquidity and Premium/Discount Evaluation

Large ETFs like VOO handle massive flows without price impact. Smaller, specialized ETFs might trade away from their net asset value (NAV) during stress.

Red flags:

• Consistent premiums/discounts to NAV
• Low average daily volume
• Wide spreads during market stress.

Tax Efficiency Beyond Distributions

Evaluate the fund’s ability to maintain tax efficiency under different market conditions. Index funds maintain efficiency easily. Active ETFs with high turnover might sacrifice that for performance.

Evaluation criteria:

• Historical capital gains distributions
• Portfolio turnover rates
• Tax efficiency during different market environments

The Bottom Line

Evaluating an ETF isn’t about finding the smartest strategy or the lowest fee. It’s about matching client needs with appropriate trade-offs.

Begin every evaluation with client diagnostics, including time horizon, risk appetite, income needs, and tax situation. Then, systematically evaluate the strategy’s pros and cons within that context. Finally, assess total costs and implementation factors that could derail even good strategies.

The advisor who masters this evaluation framework won’t just help clients avoid costly mistakes—they’ll build deeper relationships based on systematic, client-focused decision-making.

Your clients don’t need you to pick winning funds. They need you to evaluate options systematically and help them understand the trade-offs they’re making.