Due diligence is a critical part of successful investing. It has been a standard practice for the better part of the century since the concept was included as part of the Securities Act of 1933, placing enormous liability on those who offer securities.

Today, the goal of due diligence remains the same: to verify an investment opportunity’s credibility. The tactics for doing this, however, have been changing as the world becomes more digital. The old way of practicing due diligence has become obsolete, and the new way is opening doors to more new opportunities.

Due diligence is best defined as practicing a measure of prudence. It all boils down to getting a better understanding of an investment opportunity, with a goal of uncovering the investment’s current standing and trying to predict its performance in the foreseeable future.

Practicing due diligence before investing in any asset is crucial. The way you do it, however, matters. 

Presently, the old way of practicing due diligence will limit your scope, often wasting valuable time and delivering less-than-reliable results. Traditional due diligence procedures can take weeks or even months to gather and process all the relevant information needed to make an investment decision. That’s time during which market movements could upend those assumptions and render the research moot.

Today’s markets simply move too fast for investors to waste time.

How to Conduct Due Diligence on ETFs

The actual process of due diligence varies depending on the investment in question.

For example, when conducting due diligence on an exchange traded fund (ETF), you would, ideally, need to look into the following factors:

  • The underlying index: The underlying index that an ETF is based on is an indicator of its credibility. Factors to consider would include weighting (by price or any other relevant measure) and frequency of component change, which determines the investment’s costs and returns.
  • The ETF’s structure: Does the ETF hold the entire index or only a part of it? Is it narrow or broad? Does it lend securities? These are some crucial factors that determine the ETF’s structure. It would also be important to consider the ETF’s legal format and track errors between the ETF and its index, among other things.
  • The ETF’s sponsor: Who is sponsoring a given fund and what is their credibility in the market? Factors to consider would include the sponsor’s size, experience in the markets, reputation, and comprehensive track record, among other things.
  • Investment cost: Costs to consider would consist of the ETF’s total expense ratio, transaction fees, commissions, and the bid-ask spread, among others. An ETF’s costs tend to fluctuate over time depending on the frequency of component change, so continuous assessment would be necessary.
  • Liquidity: Factors to consider include the ETF’s daily volume, the liquidity of its underlying shares, and the risk of dramatic price swings, among others.

A New Type of Diligence

Modern due diligence needs to be thorough to keep up with the competition and uncertainties in the markets, but it also needs to be fast in order to adapt to changing market conditions.

There are thousands of active ETFs and mutual funds available today, and data on each and every one of them is now available online. To save time and run broad-based comparisons, investors shouldn’t rely on public databases and other sources to gather the data they need to support their due diligence process.

However, without analysis data is just a series of numbers. Today’s sophisticated algorithms help investors make sense of the data, considering all relevant factors when determining different aspects of potential investment opportunities.

Don’t wait to act on what your diligence uncovers. Many tools today integrate with the major trading platforms, allowing users to execute investments and transactions directly once they are satisfied with their options. 

Information drives the markets, and today’s diligence tools make it easier than ever to stay up on the latest news on developments affecting the market, as they happen.

Magnifi and Due Diligence 

Magnifi offers a new and better way of conducting due diligence on ETFs and mutual funds. It is easier, faster, and more reliable compared to traditional practice. By leveraging the power of semantic search and advanced digital technology, it offers immediate and detailed access to the world of ETFs and mutual funds, with in-depth information on each asset.

Learn more and get started at Magnifi.com.

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Try it for yourself today.

This blog is sponsored by Magnifi. The information and data are as of the publish date unless otherwise noted and subject to change. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. [As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer, custodian, investment advice or related investment services.]