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Analyzing ETFs

Slide 2: Analyzing ETFs

ETFs have a lot to offer. They're flexible, low-cost, and because their underlying portfolios are protected from the impact of investor trading, they are often more tax-efficient than mutual funds. ETFs can also give investors access to specific subsectors that mutual funds cannot. Still, like all investments, you must look carefully before you leap, and Morningstar’s ETF Analyst Reports can help you do that.

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Slide 3: Analyzing ETFs

Thesis

This is the heart-and-soul of each ETF Analyst Report. Here you’ll find a concise summary of an ETF’s bona fides including Morningstar's take on how the fund could fit into your portfolio, whether now is a good time to buy the fund, how the fund’s holdings are selected, and alternatives that you may wish to consider.

Slide 4: Analyzing ETFs

Suitability

Not all ETFs are right for all investors. In this section our analysts look at who exactly should be considering the fund, and how it may fit into an overall investment strategy. Some funds may be appropriate as a core holding, while others may be better suited to a specialty role.

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Fundamental View

In this section you can find Morningstar's take on the fundamental investment factors that need to be considered before buying a particular ETF. Is an index over, under or fairly valued? What will drive commodity prices up or down? Does a particular sector have competitive advantages that could help it outperform the broader market?

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Portfolio Impact

Whether you're using ETFs to build an efficient, low-cost portfolio or to opportunistically invest in certain market segments, portfolio construction matters. For instance, what index does the ETF track? How concentrated or sprawling is the portfolio? How does the fund weight its holdings? What biases does that approach introduce?

The Portfolio Impact section should help you determine how an ETF might, or might not, fit into an asset allocation strategy and what influence it might have on your portfolio's overall risk/reward profile.

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Slide 7: Analyzing ETFs

Fees

Fees are a key differentiator in the ETF world; generally speaking, the lower a fund's expense ratio the better.

For instance, are fees high or low in absolute terms? Cheap compared with open-end mutual funds? What about comparable ETFs? This section puts fees in a proper context so you can accurately judge the fund's expenses.

Slide 8: Analyzing ETFs

Alternatives

There can be several ETFs that track the same or similar indexes. This section will help you compare the pros and cons of these alternatives and assess if another fund would actually be a better fit for you.

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Slide 9: Analyzing ETFs

ETF Fair Value Estimate

Our estimate of an ETF's intrinsic worth is predicated on the fair value estimates that Morningstar equity analysts have placed on the fund's holdings. By aggregating these fair value estimates, we can derive an estimate of the ETF's intrinsic worth.

The fair value estimate is not to be confused with an ETF's net asset value (which is the literal value of a fund's holdings based on quoted market prices). An ETF's fair value estimate represents what we think its holdings are worth in the aggregate.

By comparing an ETF's estimated fair value with its market price, we can determine whether the fund is overvalued, undervalued, or fairly valued.