Here at ETF Action, we live and breathe funds. Every day, we’re neck-deep in the data, analyzing the constant flow of new products and tracking the subtle shifts in existing ones. And if there’s one thing we’ve learned, it’s that the explosion of choice in the ETF world is both a blessing and a curse. It’s never been easier to build a sophisticated, global portfolio. But it’s also never been easier to buy something you don’t fully understand.
A fund’s name is a marketing tool. Its category is a starting point. But neither tells the whole story. Relying on them alone is like navigating a new city with a tourist map instead of a GPS. You’ll get the general layout, but you’re bound to miss the critical turns.
This is why we’ve built our entire platform around a simple but powerful idea: empowering investors to make confident decisions by truly understanding what’s “under the hood.” It’s not about finding a secret formula to beat the market; it’s about building a repeatable process to ensure the products you choose actually do what you expect them to do. This is our five-step SCOPE framework for navigating the ETF universe with clarity and confidence.
Step 1: Screen the Universe (The Map)
The ETF market is a sprawling metropolis of thousands of products. You can’t analyze them all. The first step is to narrow the field, and for that, you need a map. This is where a robust, well-defined classification system comes in.
This is your initial filter. Based on your investment goals or macro assumptions, you define the type of exposure you need. Let’s say you believe small-cap value stocks are poised for a run. You can use the classification system to screen for all funds in the ‘Equity: U.S. Small Cap – Value’ category. In seconds, you’ve gone from a universe of 3,000+ equity ETFs to a manageable list of a few dozen candidates. This step is about defining your intent and creating a workable list of potential solutions.
Step 2: Confirm the Exposures (The GPS)
Now that you have your list of candidates, it’s time to verify they are what they claim to be. This is where we move from the subjective (what a fund says it is) to the objective (what it actually owns). This is accomplished by using rules-based derived analytics. This proprietary system, which is part of our suite of institutional datasets, performs a look-through analysis of a fund’s holdings to assign it characteristics based on data, not marketing.1
This step uncovers critical discrepancies. For example, the S&P 500 is often seen as a single benchmark, but as we’ve detailed in our analysis of the three different ways to view the index, how you slice it matters immensely. The classic market-cap-weighted SPDR S&P 500 ETF Trust (SPY) is categorized as a ‘Blend’ fund, but our analytics assign it a ‘Growth’ style due to the heavy influence of mega-cap tech.2 Weighting the same 500 stocks by revenue, as the
Invesco S&P 500 Revenue ETF (RWL) does, results in a clear ‘Value’ assignment. Weighting by earnings, like the WisdomTree U.S. LargeCap Fund (EPS), produces a ‘Core’ profile.2 Same stocks, three different exposures—a crucial distinction only revealed by objective analysis.
Step 3: Observe the Composition (The Engine)
Once our analytics confirm what a fund is, the next question is how it achieves that profile. Just because two funds share a category label doesn’t mean they offer the same exposure. This is a concept we explore frequently in our Factor Flavors series. For instance, not all ‘value’ funds are the same; there are many ways to unpack the different tastes of value. The same is true for ‘quality’ funds, where there’s more than one way to buy quality. Even within a seemingly straight-forward category, there are multiple flavors of risk and return within high-yield bonds. Digging into the underlying data reveals the ‘why’ behind the label, showing if a fund’s profile comes from a heavy sector bet, a specific size tilt, or a unique quality screen.
Step 4: Probe the Past (The Logbook)
The fourth step is to zoom out and look at the fund’s history. Is its current profile a consistent, long-term characteristic, or is it a recent fluke? A fund might look like a deep value fund today simply because its holdings have underperformed, not because its methodology is designed to find cheap stocks.
Momentum is the perfect example of this. A momentum ETF is a market chameleon, designed to hold whatever has recently performed well. Today, that might mean a heavy concentration in high-flying tech stocks. But as we’ve shown, not that long ago, during an inflationary period, the same strategy would have been overweight in energy companies. The factor itself is consistent, but its underlying composition—the actual stocks and sectors you own—can change dramatically. Understanding this historical context is crucial to knowing what you are truly buying.
Step 5: Examine the Issuer (The Manufacturer)
Data tells you the what, how, and when. The final piece of the puzzle is the qualitative check: visiting the issuer’s website. This step is about understanding the people and philosophy behind the product. How do they position their own strategy? Do they provide high-quality, easy-to-understand collateral like fact sheets, methodology guides, and regular commentary?
An issuer that invests in educating its clients is demonstrating a commitment to its products beyond just gathering assets. Quality materials not only give you a better understanding of the strategy but also offer a window into the firm’s expertise and transparency. This qualitative check provides context for the quantitative data, ensuring you’re partnering with an issuer who is as serious about their products as you are about your portfolio.
Conclusion: Confident Investing, Simplified
This five-step SCOPE process—Screen, Confirm, Observe, Probe, and Examine—forms a comprehensive framework for modern due diligence. It moves you from being a passive fund taker to an active, informed decision-maker.
This level of analysis might sound daunting, but it doesn’t need to be difficult or expensive. This is precisely why we built the ETF Action platform. Our goal is to deliver this power through a user-friendly, intuitive tech stack—a level of professional analysis you simply can’t perform on a simple mobile screener. We bring all of these tools together in one accessible place, from our comprehensive classification system to our deep institutional datasets.
Ultimately, ETFs are tools to empower investors. But there’s no crying in investments; sometimes you’ll simply make the wrong call on the market. The goal is to ensure that when you do, it’s because your thesis was wrong, not because your tool was wrong. By using a platform that facilitates a disciplined process, you can be sure you made an informed choice, and that is the most any investor can ask for.
Disclosures
This material is for informational purposes only and should not be considered investment advice. All investments, including ETFs, involve risk, including the possible loss of principal. Investors should consider their investment objectives, risks, charges, and expenses carefully before investing.
This analysis was developed by the team at ETF Action. We leverage advanced AI tools to assist in the drafting and refinement of our content, based on our expert prompts, direction, and final review.
