Morningstar Advisor

To aid advisors in selecting strategies, Morningstar has developed a portfolio attribute classification system for ETF managed portfolios. This new structure consists of four main attributes: Universe, Asset Breadth, Portfolio Implementation, and Primary ETF Exposure Type. With better insight into a strategy's attributes, advisors can better understand its broad philosophy.

See the Attribute and Classification Summary matrix for an overview of the four main attributes and options of each.

In this Solution, we focus on the Universe and Asset Breadth attributes.

Universe
This attribute (global, international, or United States) describes the starting scope of a strategy's investment process. The distinction is based upon the exposure of the underlying securities within the ETF used, not the domicile of the ETF itself. The initial selection of this attribute is based on many factors, including an analysis of available portfolios. We also review a firm's description of the investment strategy to note any starting universe or list of available ETFs for investment.

Universe: United States
These portfolios primarily use ETFs providing exposure to U.S. equity and fixed-income securities.

Universe: International
Strategies assigned this attribute primarily use ETFs providing exposure to non-U.S. equity and fixed-income securities.

Universe: Global
These strategies have the opportunity to add exposure to any market across the globe and have historically employed such flexibility.

In benchmark or starting portfolios, the Global attribute was assigned to strategies with at least an 80/20 split among U.S. and international exposure. We also took into account, where necessary, the regional exposure of the dominant asset driver designated in the Asset Breadth attribute (see next slide).

Asset Breadth
This attribute indicates a strategy's primary asset class exposure or return driver. There are five options here: All-Asset, Alternative, Balanced, Equity, and Fixed Income. These selections don't indicate that the whole portfolio is, for example, invested in equities or fixed income, but rather sets the expectation for advisors and investors regarding the primary driver of returns. Classification within this attribute includes an analysis of historical portfolio asset allocations and a review, if available, of a strategy's investment policy benchmark or starting portfolio.

Asset Breadth: All-Asset
All-Asset strategies have the widest and most-flexible scope to invest across asset classes. This attribute is designated to strategies that consistently held more than 10% in "Other" assets as well as in underlying equity and fixed-income securities.

Asset Breadth: Alternative
Alternative strategies seek returns uncorrelated to equity and fixed-income markets by attempting to remove one or more asset betas or return drivers. They use long/short strategies or other alternative ETFs, such as currencies or commodities, as the primary return driver in the portfolio.

Asset Breadth: Balanced
The balanced option indicates strategies in which the return driver is a combination of equity and fixed-income exposure on a dedicated, ongoing basis. These strategies typically have a 30% to 70% allocation to equities.

Asset Breadth: Equity
The primary asset driver of these strategies is long or beta-type exposure to equity securities. The use of leverage by the underlying ETF is ignored. These strategies typically have at least a 70% allocation to equities.

Asset Breadth: Fixed Income
The primary asset driver of these strategies is long or beta-type exposure to fixed-income securities. The use of leverage by the underlying ETF is ignored. These strategies typically have less than a 30% allocation to equities.

In the next Solution Center presentation, we discuss the Portfolio Implementation and Primary ETF Exposure Type attributes.