Morningstar Solutions
ETF Solutions
Using ETFs Opportunistically
Slide 2: Using ETFs Opportunistically

ETFs can be great tools in your investing toolbox. They can be cheap, flexible, and tax-efficient. But to benefit from what they have to offer, you must resist "short-termism" and avoid the temptation to pile into the hottest-performing funds.

ETFs are versatile investment vehicles, so there's more than one way to effectively incorporate them into a portfolio. In this ETF Solution, we'll talk about one way investors can opportunistically tap into the best that ETFs have to offer.

Slide 3: Using ETFs Opportunistically
There's plenty of money to be made from opportunistic investments in stock ETFs. What many investors forget is that an investment in a stock ETF isn't a wager on the value that the market places on a piece of paper. It's an ownership stake in dozens, if not hundreds, of underlying businesses. Thus, we think the key to successful, market-beating ETF investing is an unerring focus on long-term business fundamentals.
Slide 4: Using ETFs Opportunistically
You're probably wondering how this helps you beat the market. If we assume that the market, for all of its short-term gyrations, is efficient over the long haul, then we would expect the prices of assets to eventually converge to their intrinsic values. Thus, if the market is bidding down various businesses, perhaps because sentiment has turned sharply negative, but the intrinsic worth of those firms hasn't changed one iota, we'd expect the market to eventually see the error of its ways and push up the prices of those businesses to a level that approximates their fair value.
Slide 5: Using ETFs Opportunistically

Investors can use ETFs as a way to gain exposure to undervalued areas of the stock market. Our equity analysts have placed fair value estimates on 1,500-plus stocks, and by aggregating those fair value estimates, we can also estimate the fair values of dozens of equity ETFs. To determine if an ETF is over- or undervalued, we compare our fair value estimate for the fund with its current market price.

An ETF is likely to get our attention if it is trading substantially below our fair value estimate. By contrast, if it's trading at a premium to our fair value estimate, we'd probably take a pass.

Slide 6: Using ETFs Opportunistically
End of story? Not quite. Our analysts base their forecasts on assumptions that they make about the growth, profitability, and competitive positioning of the firms they're analyzing. Because all of these assumptions are uncertain to varying degrees, we want to afford ourselves a margin of error when we invest. In that way, if our fair value estimates prove too rosy, we're not necessarily left in the lurch.
Slide 7: Using ETFs Opportunistically

In calculating a margin of safety, it is important to consider all the possible variables including secular trends, macroeconomic themes, and even sector momentum. In our ETF Analyst Reports, you're likely to hear us harp on a few recurring themes--company quality (i.e., "economic moat"), business risk, portfolio diversification, and cost. All of these factors impact the fair value estimate that we place on an ETF and the margin of safety we demand when investing in it.

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Slide 8: Using ETFs Opportunistically
Morningstar Premium Members can go to our  ETF Valuation Quickrank page and see for themselves how the ETFs stack up in terms of fundamental valuation and return potential. If you're not a Premium Member, you can take a free 14-day trial to access our ETF Picks list, as well as all of our other Premium benefits, including our ETF Research Reports (now covering more than 350 ETFs),  Mutual Fund Analyst Picks, our  Asset Allocator tool, and much more.
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Using ETFs Opportunistically
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