Matt Hougan has created a great guide for selecting ETFs. He takes a look at whether advisers should be using ETFs for their clients. He gives us five things to look for when selecting an ETF:

1. Check Your Commissions
2. Check The Index
3. Check The Tracking Error And Spread
4. Check The Back-Test
5. Check The Turnover

I’m a big fan of ETFs and use them in my personal portfolios. His advice about checking the back-test is insightful. Most advisors don’t own anything like TradeStation or have the skill set to recreate ETF trading strategies to see if they’ve been unduly optimized against past data.

But his tip about looking for odd numbers is a great rule of thumb. Consider an EFT where the stated strategy is to buy stocks with a P/E ratio between 12.5 and 14.7 that had IPOs in April. There’s a pretty good chance the people launching the ETF plugged every possible odd combination into their strategy and picked the one that gave them the best past results. That’s just a way to cheat your back-test data so you can report higher returns.

He also opines on the recent explosive growth in this segment:

But recent trends in the industry have me worried. Average expense ratios are creeping up, average fund turnover is increasing, and recently, many product launches look more like reflections of marketing than reflections of the market.

Consider the aforementioned Listed Private Equity fund, from PowerShares. If there ever was a fund designed to ride the coattails of a media phenomenon, this is it…